ACTIVITY BASED COSTING

Group Members● Muhammad Yasir● Fozia Ahmad● Maryam Rahim● Hammad Khan● Bilal Ahmad Khan● Muhammad Ali Abdullah● Yasir Altaf

ABC

Introduction

ABC

• Provides managers with useful information to measure contribution that each customer makes to overall profitability.

• Costs are assigned to each resource specifically to give a clear picture of total expenses.

Basic steps of abc The basic steps in using ABC are the following:

● Identify the product or service to be studied.● Determine all minute details about the resources and their cost and processes that are vital to the production of good or delivery of good.● Determine the cost driver; the cost of labor and cost of raw material.● Gather cost and other data such as time taken for each process and resource.● Use the data to calculate the overall cost of the product.

ABC

Status of abc

ABC

“ACTIVITY BASED COSTING SYSTEMADVANTAGES AND DISADVANTAGES”

By Metan Rehanglu

ADVANTAGES:● Costs can be more accurately measured and hence better decisions regarding product mix decisions.● Accurate Pricing decisions that eventually lead to better management.● Better estimate of profitability of products● Investments on new technologies can be better estimated by using ABC. ● The information generated by ABC approach aids companies in redesigning products to more common parts.● It helps in making budget more flexible than the conventional one. Multiple cost drivers are used in flexible budget that help in explaining behavior of overhead costs.

ABC

Issues with Job costing and necessity for ABC

Single cost allocation base which is often arbitrary and is usually not necessarily associated to production.• Companies have two options to maximize their

profits. Cut cost OR Correct price

Cutting costs is not a solution and often lead to troublesome results because of need of overhead costs. The second reaosn of correcting the produvts’s price

leads management towards ABC.

ABC

Disadvanages/issuesThe management of company is often reluctant to

accept it. • Activity based costing approach uses multiple

cost drivers which are costly to implement.• The timliness of information is the issue that prevails even if company is using ABC approach. • Quality of information obtained through interviews and surveys is often questionable

ABC

TIME DRIVEN ACTIVITY BASED COSTINGBy

Robert S.Kaplan and Steven Anderson

Need arise because it is difficult to maintain ABC with changes in resource spending, addition of new products and increase in

number of individual orders

ABC

Issues in using a simple abc

When people at work are asked to assign percentages to the time they spend on different activities. On adding up, these

answers reflect percentage of above 100 in most cases.

Maintenance of ABC demands re-interviews and re-resurvey.

ABC

Issues in using a simple abc ..contdAll data is gathered by interviewing

employees which may not be factual and accurate.

When new activities are added to the model, there are no ways to update the

model without re-estimating the cost that should be assigned to new activity.

ABC

Time driven abc

Less costly approach.

The time driven model is flexible and takes in to account practical capacity of the

resources applied

ABC

IMPLEMENTING ACTIVITY_BASDED COSTING IS EASY!As long as people aren't involved ...

ByDon Devost, Analog Devices, andPeter J. Miller, IBM Corporation

Focus on different issues and situations that occur when ABC is implemented at one of the world's largest semiconductor facilities, IBM

Burlington

ABC

issues

Project Planning and Expectations: A typical implementation will span the resources of several organizations and require a wider array of operational and financial data in more systems

than has ever before been collected.

Fear of Layoffs: When ABC is implementing in an environment in which there has been layoffs or the threat of layoffs, white collar employees in particular dislike the idea of tracking their

activities, with or without the threat of layoffsResistance to Results and Change: The ultimate form of resistance to change is complete, unthinking, unshakable

denial. Clearly the person making such a statement is going to be incredibly difficult to deal with. It may well be impossible to

ever really win them over

ABC

Implementation of abc

Providing insight into the fastest-growing and least visible element of cost-overhead.

Improving profitability by monitoring total life-cycle cost and performance.

Improving the effectiveness of budgeting by identifying the cost/performance relationship of

different service levels

ABC

Implementation of abc ..cont..

Encouraging continuous improvement and total quality control because planning and control are directed at process

level.

Linking corporate strategy to operational decision makingFacilitating elimination of waste by providing visibility of

non-value added activities.

Improving make/buy, estimating, and pricing decisions that are based on product cost that mirrors the manufacturing

process.

ABC

conclusion

ABC

The effect of strategy and organizational structure on the omplementation of abcby

Maurice GosselinUniversite’LavaE

This article published in 1996, discusses the effect of strategic decisions and organizational structure on the adoption of activity based costing and its managementIn this regard studies done by Kaplan in 1986 have suggested four possible explanations for the management accounting lag they can be

1. Lack of adequate role models.2. The prevalence of computer based accounting system.3. The emphasis on financial accounting.4. Less emphasis of top management on the improvement and importance if management accounting systems.

ABC

Activity management is an effective tool for the SBUs activities to use its resources to achieve its objectives. It provides information for value chain analysis and strategic cost managementABC traces cost to products and services in two different levels.

1. Over head cost can be identified with the homogenous activity based cost pools.2. Pooled cost is applied to products using measures of the activities consumed.

ABC

● Only one organizational determinant, vertical differentiation proved to have a significant impact on the decision to adopt ABC. Whereas vertical differentiation is critical determinant in the organic model since it tells about how much the decision making in organization is bureaucratic.

● SBUs that have high vertical differentiation facilitate the selection of administrative innovation like ABC.Vertical differentiation has more impact on the adoption process of ABC than on the implementation process.

● Organizational strategy and structure influence the adoption and implementation of Activity Management approaches to some extent.

ABC

● Organizations that compete through innovation and product and market development are more open to new techniques that enable their managers to improve processes and information so organization that don’t readily accept innovation are less likely to adopt the ABC practices.● For organization to be mechanistic more emphasis, will be on the formal systems of ABC whereas for organizations that, are organic will favor informal adoption of ABC.● Mechanistic organizations it will be easier to implement ABC where as ACA and AA are facilitated in organic organizations● Survey have shown that diffusion process of ABC is not intense even though great deal of emphasis was placed upon it● Adoption and implementation of Activity management depends upon many contextual factors.● Organic organizations start with ABC process but they stop at the levels of ACA and AA.● Organizations that are significantly correlated in centralization and formalization have implemented and adopted ABC successfully

ABC

ACTIVITY-BASED COSTING/MANAGEMENT AND IT’S IMPLICATIONS FOR OPERATIONS

MANAGEMENT By

M. Gupta , K. Galloway College of Business and Public Administration,

University of Louisville. USA

ABC

ABC

● Due to intense international competition companies are getting highly competitive in adopting information systems and technologies. Companies are giving great importance to the introduction of new products and the quality of processes● Cost drivers can be of many type but here those are only identified that have significant impact on the cost of activites. It based on● Indentifying resources.● Identifying its cost drivers.● Identifying activities ● Identifying activities cost drivers● Identifying object of work.

issues

● Firms that haven’t employ the traditional costing system have difficult in the justification and prioritization of cost however with improved ABC management system this can be over come as managers can identify non-value added activities.● Different costs have been identified which are not address in traditional costing system whereas ABC costing system identify cost in three categories (a) prevention, (b) appraisal (c) internal failure (d) external failure. Many of these cost fall under non value added activities that are ignored in ABC system

ABC

Issues..cont..

ABC

● With traditional costing system it is difficult to identify the cost of rework but ABC can help managers to identify many of the costs that are ignored before.● ABC system can be used by many type of manufacturing companies that combine jobs specially but it fails to ignore If all the jobs are combined.● ABC system has issue in implementation as it si difficult to separate one activity entirely from the other activity.● ABC needs more empowerment of the managers that can lead to misuse to powers by the managers.’● Switching from traditional to ABC costing is lengthy and expensive process which most firms try to avoid.

The Research of Effectiveness of Using

ABCin China’s Listed

Companies

ABC

Introduction

● Concept of ABC applicable to the western countries since a long time● In the Orient, its relatively new ● Applied in the manufacturing, finance and telecom sectors as of yet● Paper attempts to analyze the productivity against the application of ABC.

ABC

Variables under consideration

● Return on Assets● Size of the firm● Activity based costing● Regression analysis

ABC

Conclusion

● ABC improves performance of the companies that use it● Strong correlation between ROA and ABC● ABC improves the performance of businesses

ABC

recommendations● Should be applied in the eastern countries.● Factors such as degree of centralization, product diversity and ratio of indirect to total costs should be taken into account before taking decision to apply ABC or not.● Use accurate cost drivers to allocate costs efficiently and rationally.

ABC

FACTORS INFLUENCING ACTIVITY-BASED COSTING

SUCCESS: A RESEARCH FRAMEWORK

By Zhang Yi Fei and Che Ruhana Isa

ABC

introduction● Methods for calculating costs have been evolved (Kaplan and Johnson 1987).

● Accounts specialists have developed new costing methods such as Activity Based Costing. ABC (Activity Based Costing).

● ABC provides us with more thorough information about processes.

ABC

analysis● Organizations face problems in implementing ABC.● Various independent variables support or oppose the implementation of ABC.● Studies revealed that there are two types of variables:1- Technical Variables2- Contextual, Behavioral and Organizational Variables

ABC

Conclusion● Implementation of ABC mostly fails because more emphasis was on technical rather than Contextual and other organizational variables.

● Relatively later studies showed that contextual variables play a very vital role in the implementation.

ABC

Recommendations● Research should be conducted to find out the reasons for the failure of ABC implementation in an organization.

● A theoretical framework has been proposed, which will be used to measure the success of ABC in an organization.

ABC

Recommendations..cont..

The Framework:

ABC

TIME DRIVEN ACTIVITY BASED COSTING IN AN OUTPATIENT CLINIC ENVIRONMENT: DEVELOPMENT, RELEVANCE AND MANAGERIAL IMPACT

ByNathalie Demeere, Kristof Stouthuysen, Filip Roodhooft

ABC

introduction● Managers of healthcare institutions are continuously criticized for not providing low cost health solutions.

● The article is related to time driven Activity Based Costing of five Outpatient Departments (OPD) and describes the benefits of using such analysis.

● Recently new costing techniques have been developed like Activity Based Costing (ABC) which allocates resource cost to products based on the resource consumption.

● Kaplan and Anderson developed a new technique called Time-Driven ABC (TDABC). This technique can be applied quickly as there are only two parameters required:The unit cost of supplying capacityThe time required to perform an activity

ABC

analysis● Lately more and more hospitals are applying ABC and it related costing methods to improve efficiency.

● Studies have proved that this method is of more benefit to the organization but it not easy to implement. This the main issue with TDABC as well.

● The OP clinic which was studied is in Belgium and it has 19 independent departments but in our study we only collected data from five departments.

ABC

Analysis..cont..● Following are the criterion of selection: - Number of Patients-Workload

● The paper also explains the Outpatient Clinic TDABC analysis, for that the activity analysis is done and relevant time equations are developed then an overview of all related outpatient clinic costs are figured out and identification of costs per minute is done.

ABC

Analysis..cont..● The most important activities of an OPD

were identified based on several factors, and it is shown in the diagram below:

ABC

ConclusionIn the article the impact of TDABC on an Outpatient Clinic is being shown, this system seems to be well suited for an OP Clinic. This costing technique includes benefits of typical ABC as well. The TDABC challenges the managers and department heads to identify the cost drivers and in this way they can clearly see the improving opportunities. Secretaries were centralized and telephone facility to everyone and head sets were provided to doctors. Moreover the voice recognition systems were introduced so that typing mistakes are avoided. Moreover it created an understanding of different processes among the employees.

ABC

RecommendationsIt’s been recommended that the implementation of TDABC instead of simple ABC is more effective but it might be a bit difficult to implement considering

the fact that employees in most cases reject change. On the basis of data gathered from TDABC the non value adding processes must be removed, so that the costs are incurred on only those steps

which actually add value to the whole process. Lowering of costs increases the opportunities to

grow. ABC

Implementation of Activity-Based Costing in e-Businesses

•Implementation of Activity-Based Costing for EasyBuy. Com•Activity-based costing is implemented in 5 major steps.•First step is to determine major activities of the company.

• Second step is to obtain expense categories. The expenses accounts and their values have been acquired from financial statement of the company, namely income statement.

• In the third step, cost of every activity-based cost center is determined. To accomplish this step, first of all activities match with the expense categories by determining which activities lead which expense categories.

• The next step is to trace the activity centers' costs to cost objects, which are determined as professional sellers and individual sellers in this study.

• In the last step, the operating profit of each seller group is determined.

Conclusion

• Activity-based costing is an appropriate costing method for service companies, which have big proportion of overhead cost in total costs.

• The purpose of ABC is to more accurately define the overhead and/or indirect costs associated with the manufacturing process and apply those costs to the product.

• From this perspective, activity-based costing gains substantial importance for e-businesses whose all costs are nearly in the category of overhead cost.

Thank you

ABC