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Muhammad Mustafa ( Mbasp09-A-001)Muhammad Arbab Jehangir (003)Muhammad Nadeem (014)Rizwan Haider (083)

Muhammad Kazim (087)

ACTIVITY BASED COSTING AND TRADITIONALACTIVITY BASED COSTING AND TRADITIONAL

COSTING SYSTEMCOSTING SYSTEM

COMSATS INSTITUTE OF INFORMATION

TECHNOLOGY, SAHIWAL

Department : Management Sciences

THE WMTS ARTS

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WHAT IS COST?

What isActivity Bas Costi Syst ?

I PO TANTANCE OFACTIVITY-BASED COSTING

STEPS FO I PLE ENTINGACTIVITY-BASED

COSTING

What is Traditio alCosti Syst ?

ACTIVITY-BASED COSTING VS T ADITIONALCOSTING

LI ITATIONS OFACTIVITY BASED COSTING

SU ARY

ROADMAPOF THE PRESENTATION

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Cost is a for oi , as r d i o tary t r s, i curr d

or ot tially to i curr d to achi v a s cific

o j ctiv .

Each odificatio i li s acertai attri ute hich isi ortant inco utingand easuring thecost hich is

to serve the anagement levels inachieving their asic

o jectives of lanningandcontrol.

It is a fundamentalaxiom that acost must eunderstoodin its relationshi to theaims or ur oses hich it is to

serve.

WHAT IS COST?

According To American Accounting Association

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Activity asedcosting

(ABC)

Traditionalcosting

(TC )

METHODS OF CALCULATING COST

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ABC as first clearly defined in 7 y Ro erts aplanandW.Bruns.

They initially focused onmanufacturing industry hereincreasing technology andproductivity improvementshave reduced the relativeproportion of thedirect costs oflabor andmaterials, but have increased relative

proportion of indirect cost.

For Example, Increasedautomationhas reducedlabor,hich is adirect cost, but has increaseddepreciation,hich is an indirect cost.

HISTORYOFACTIVITY-BASED COSTING

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A method of measuring the cost and performance of

activities and cost objects.

Activity based costing (ABC) is a costing method that is

designed to provide managers with cost information forstrategic and other decisions that potentially affect capacityand therefore fixed costs. Activity based costing is ordinarilyused as a supplement to rather than as a replacement for thecompanies usual costing system.

WHAT IS ACTIVITY-BASED COSTING SYSTEM?

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ABC is acost accountingmethodology that canprovidedefinitions ofprocessed, identify hat thecost drivers of those

processes are, determine theunit costs of various products andservices, andcreate various reports onagency components thatcanbeutilized to generateactivity or performancebasedbudgets.

Amajor advantage ofusingABC is that is avoids orminimizesdistortions inproduct costing that result fromarbitraryallocations of indirect costs.

WHYACTIVITY-BASED COSTING IS IMPORTANT?

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Sales are increasebut profits aredeclining.

Overhead rates are very highand increasingovertime.

Product lines arediverse.

Direct labor is smallpercent of totalcost.

Competitors high-volumeproduct seems tobepricedunrealistically lo .

WHY TO USE ABC?

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STEP :IDENTIFYAND DEFINEACTIVITIES

ANDACTIVITY COST POOLS

STEP 2:DIRECTLY TRACE OVERHEAD COSTS

TOACTIVITYAND COST OBJECTS

STEP3:ASSIGNCOSTS TOACTIVITY COST POOLS

STEPS FOR IMPLEMENTING ACTIVITY-BASED COSTING

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STEP :

CALCULATEACTIVITY RATES

STEP 5:

ASSIGNCOST TO COST OBJECTS

STEP 6:PREPARE ANAGE ENTREPORT

STEPS

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It is a well-known fact that the traditionalcosting systems utilize a single, volume-

based cost driver. This is the reason why the traditional product

costing system distorts the cost of products. In most cases this type of costing system

assigns the overhead costs to products on thebasis of their relative usage of directlabor. For this reason traditional cost systemsoften report inaccurate product costs.

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Manufacturing and Non manufacturing cost

Cost Pool

Allocation Basis

Cost Objectives

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Decision support

Cost control

Cost

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Activity-basedcosting is morecostly to

maintain thana traditionallabor costing

system. Activity-basedcosting does not have full

support of topmanagement.

Activity-basedcosting caneasily be

misinterpreted. Organizationusingactivity-basedcosting

have to maintain 2 cost systems

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Activity-basedcostingestimates the

cost of sources consumedby cost

objects suchas product andcustomers

Theapproach taken inactivity-basedcostingassumes that cost objects

generateactivities that in turn

consumes costly resources.

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Activities form thelinkbet eencosts

andcost objects.

Activity-basedcosting is concerned

ith overhead bothmanufacturing

overheadand selling, general, and

administrative overhead.

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THANKS