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    ABC Model For A University

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    rahul
    1. Activity based costing (ABC) is an accounting methodology that assigns costs to activities rather than products or services, enabling more accurate assignment of resource and overhead costs. 2. Traditional costing systems allocate costs based on volume like direct labor hours, while ABC allocates costs to products/services from activity cost pools using allocation bases corresponding to activity cost drivers. 3. To implement ABC, an organization must identify resources, determine activities supported by resources, define cost objects, develop resource and cost drivers, and allocate costs from activities to cost objects.

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    ABC Model For A University

    Uploaded by

    rahul
    115 views20 pages
    1. Activity based costing (ABC) is an accounting methodology that assigns costs to activities rather than products or services, enabling more accurate assignment of resource and overhead costs. 2. Traditional costing systems allocate costs based on volume like direct labor hours, while ABC allocates costs to products/services from activity cost pools using allocation bases corresponding to activity cost drivers. 3. To implement ABC, an organization must identify resources, determine activities supported by resources, define cost objects, develop resource and cost drivers, and allocate costs from activities to cost objects.

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    ABC model for a university

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    ABC Model for a University

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    1. Activity based costing (ABC) is an accounting methodology that assigns costs to activities rather than products or services, enabling more accurate assignment of resource and overhead costs. 2. Traditional costing systems allocate costs based on volume like direct labor hours, while ABC allocates costs to products/services from activity cost pools using allocation bases corresponding to activity cost drivers. 3. To implement ABC, an organization must identify resources, determine activities supported by resources, define cost objects, develop resource and cost drivers, and allocate costs from activities to cost objects.

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    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    115 views20 pages

    ABC Model For A University

    Uploaded by

    rahul
    1. Activity based costing (ABC) is an accounting methodology that assigns costs to activities rather than products or services, enabling more accurate assignment of resource and overhead costs. 2. Traditional costing systems allocate costs based on volume like direct labor hours, while ABC allocates costs to products/services from activity cost pools using allocation bases corresponding to activity cost drivers. 3. To implement ABC, an organization must identify resources, determine activities supported by resources, define cost objects, develop resource and cost drivers, and allocate costs from activities to cost objects.

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    of 20

    ACTIVITY BASED COSTING-

    PRACTICAL APPLICATIONS

    By

    Parmit Choudhury (08BS0002164)


    Rishabh Gutgutia (08BS0002691)
    Rahul Chandalia (08BS0002495)
    What is ABC?
     Activity based costing is an accounting
    methodology that assigns costs to activities
    rather than products or services
     This enables resource and overhead costs to be
    more accurately assigned to the products and
    the services that consume them

    Activity-Based Costing
     Traditional allocation method


    Cost Product
     Activity-based
    s allocation method s

    Cost Act ivit ies Product s


    s

    First st age Second st age

    3
    Why use Activity-Based-
    Costing
     Underst and TRUE profit abilit y of our cust om ers,
    product s, or services
     Quant ify t he cost of non-value added act ivit ies
    such as errors and reworks
     Ident ify opport unit ies t o reduce cost s and/or
    increase efficiency
     Obt ain act ionable inform at ion t o negot iat e price
    increases for unprofit able client s
     Underst and why profit abilit y m ay be m ediocre
    despit e good st rat egic fundam ent als
     St rat ify overhead cost s so t hey can be m anaged
    m ore effect ively

    Difference Between Traditional and
    ABC
     ABC systems accumulate  Traditional costing systems
    costs into activity cost accumulate costs into
    pools. These are designed facility-wide or
    to correspond to the major departmental cost pools.
    activities or business 
    processes.  Traditional systems allocate
     ABC systems allocate costs costs to products using
    to products , services, and volume-based allocation
    other cost objects from the bases: units, direct labor
    activity cost pools using input, machine hours.
    allocation bases 
    corresponding to cost  Inexpensive to implement
    drivers of activity costs.
    and maintain.
     Relatively expensive to
    implement and maintain.

     ABC  Traditional
    Contd…
     Focuses on estimating the costs  Focuses on estimating the
    of many cost objects of cost of a single cost object
    interest: units , batches, —unit of product or
    product lines, business service.
    processes, customers, and 
    suppliers.  Because of the inability to
     Because of the ability to align align allocation bases with
    allocation bases with cost cost drivers, leads to
    drivers, provides more overcosting and
    accurate information to undercosting problems.
    support managerial decisions. 
     Allows for non-linearity of costs
     Generally estimates all of the
    within the organization by costs of an organization as
    explicitly recognizing that being driven by the
    some costs are not caused by volume of product or
    the number of units produced. service delivered.

     ABC  Traditional
    ABC-Steps to
    Implementation
    Steps to implementation
     Ident ify t he Resources (expendit ures) of an
    organizat ion
     Det erm ine Act ivit ies (work perform ed) t hat
    are support ed by Resources
     Define Cost Object s (product s, services,
    cust om ers)
     Develop Resource Drivers t o link Resources
    t o Act ivit ies
     Develop Cost Drivers t o link Act ivit ies t o
    Cost Object s

    XYZ Ltd plans to use activity based costing to determine it product costs . It
    presently , uses a single factory overhead rate for allocating factory overhead
    to products , based on direct labourhours . The total factory overhead cost is
    as follows .

    Department Factory Overhead(Rs)


    Production Support 1225000
    Production (Factory 175000
    Overhead
    Total Costonly) 1400000

    Major activities in the production support department


    Production Support Budgeted Cost(Rs)
    Activities
    Set up 428750
    Production Control 245000
    Quality control 183750
    Material Management 367500
    Total 1225000
    Other details

    Product A Product B Product C Total


    Number Of 10000 2000 50000 62000
    Units labour 25000
    Direct 10000 140000 175000
    hours
    Setups 80 40 5 125
    Production 80 40 5 125
    orders
    Inspections 35 40 0 75
    Material 320 400 30 750
    requisitions
    TRADITIONAL ABSORPTION COSTING METHOD

    Recovery rate = total overheads


    total number of direct labour hours

    1400000
    175000 = Rs 8 / labour
    hour

    A B C
    No of labour hours 25000 10000 140000
    Recovery rate 8 8 8
    Total production overhead by 200000 80000 1120000
    each
    No ofunit
    units produced 10000 2000 50000
    Factory overhead cost per 20 40 22.4
    unit(Rs)
    ACTIVITY BASED COSTING APPROACH

    Set up Production Quality Material


    Total 428750 control
    245000 control
    183750 management
    367500
    costs(a)
    Cost Drivers No of set ups Production Inspections Material
    No of 125 orders
    125 75 requisitions
    750
    units(b)
    Activity Rate 3430 1960 2450 490
    (a/b)
    A B C
    Set up cost 80 * 3430 40*3430 5* 3430
    Production control = 274400
    80* 1960 =137200
    40* 1960 =17150
    5* 1960
    Quality control =156800
    35*2450 =78400
    40*2450 0=9800
    *2450
    Material management =85750
    320* 490 =98000
    400* 490 =0
    30 * 490
    Production =156800
    25000*1 =19600
    10000*1 =14700
    140000*1
    (Factory
    Total overhead
    Overhead only) 698750
    Cost =25000 =10000
    519600 = 140000
    181650
    (175000/175000
    No of units =1 ) 10000 2000 50000
    Overhead cost /unit(ABC) 69.87 259.8 3.633

    A B C
    Overhead cost/unit 20 40 22.4
    (Traditional method)
    ABC model for a
    University
    Efficiency information
    Annual Accounting Department Costs
    Comparison of Traditional and ABC Cost
    Reporting
    Traditional ABC
    Faculty Salary Research
    Other avenues Service
    Research Teaching by program
    Admin. Exp PPA
    Infrastructure cost BBA
    Travel MBA
    Events Ph.D
    Misc Unused Capacity
    Total Total
     Traditional costing gives information about
    the costs of resources being supplied.
     ABC perspective on the same data provides
    information about what the college’s
    constituents are getting for their money.
     The problem of measuring the contributions
    of departments to programs is solved.
     Cost of unused capacity .

    Disparity among various
    departments
    Annual total cost per studentas per ABC costing (Rs )
    MBA Ph.D CPA
    Accounts Dept Cost
    Allocated 1727 1935 17529
    Infrastructure cost 1311 2227 13300
    Support Dept Cost
    Support Staff 3729 6821 2355
    Space 2579 4948 1060
    Total Cost 9346 16931 34244
     Help estimating the amount of financial aid.
     In governments and not-for-profits
    organizations, expenditures must be linked
    to specific institutional objectives.
     Level of expenditures must be assessed in
    relation to the priority assigned to those
    objectives.
     Cost data necessary to assure consistency
    between expenditures and objectives.
     No comparable mechanism to detect and
    root out inefficiencies.
    Support costs
    Support Staff cost per student per program
    Program No. of Students Cost per student
    MBA ### ###
    BBA ### ###
    Ph.D ### ###
    Space cost per student per program
    Program No. of Students Cost per Student
    MBA ### ###
    BBA ### ###
    Ph.D ### ###
    Thank
    you

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