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Activity Based Costing: Presented By: Anurag Garg Himanshu Sumit Garg Anjli

The document discusses activity-based costing (ABC), which assigns overhead costs to products and services based on their actual consumption of resources. It provides examples of activities like machine set-ups, quality inspections, and material receipts that drive overhead costs. The document also includes a numerical example comparing traditional costing, which assigns overhead based on direct labor hours, to ABC. ABC assigns significantly different overhead costs per unit to two products based on their different activity levels, providing a more accurate costing than the traditional method.

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Sumit Garg
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86 views

Activity Based Costing: Presented By: Anurag Garg Himanshu Sumit Garg Anjli

The document discusses activity-based costing (ABC), which assigns overhead costs to products and services based on their actual consumption of resources. It provides examples of activities like machine set-ups, quality inspections, and material receipts that drive overhead costs. The document also includes a numerical example comparing traditional costing, which assigns overhead based on direct labor hours, to ABC. ABC assigns significantly different overhead costs per unit to two products based on their different activity levels, providing a more accurate costing than the traditional method.

Uploaded by

Sumit Garg
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACTIVITY BASED COSTING

PRESENTED BY:
anurag garg
Himanshu
Sumit garg
Anjli
Activity-Based Costing

Activity-based costing (ABC) is a costing model


that identifies activities in an organization and
assigns the cost of each activity resource to all
products and services according to the actual
consumption by each: it assigns more indirect
costs (overhead) into direct costs.
The ABC Approach
Pros and Cons of ABC

Benefits:
1. ABC is less likely than traditional costing
to under cost or over cost products.
2. ABC may lead to improvements in cost
control.

Limitations:
3. Expensive relative to traditional system!
Limitations of Activity-Based
Costing
 Can be expensive to use.
 It is a time-consuming method.
 ABC is not confirmed to generally accepted
accounting principle.
 As this concept is in infancy stage, so no
information about this concept is available.
NUMERICAL
XYZ Ltd. Manufactures two products A and B. The
product A is a low-volume item and its sales are only
5,000 units / annum. The product b is a high-volume
item and its sales are 20000 units / annum. Both
products require two direct labour-hours for
completion. The company works 50000 direct labour-
hours each year as given below:
Product A: 5000 units X 2 hours 10,000
Product B: 20000 units X 2 hours 40,000
Total hours : 50,000
NUMERICAL (cont..)
Details of costs for materials and labour for each product(per
unit) are given below:

Products A B
Direct materials
25 15

Direct Labour 10 10

The company’s total manufacturing overheads costs are Rs.


8,75,000 per annum.
The company has analyzed its operations and has determined
that five activities act as cost drivers in the incurrence of
overheads costs. Data relating to the five activities are given
below:
NUMERICAL (cont..)
Number of events or transactions
Traceable
Activity costs Total Product A Product B

Machine Set-ups 2,30,000 5,000 3,000 2,000


Quality Inspections 1,60,000 8,000 5,000 3,000
Production Orders 81,000 600 200 400
Machine-Hours worked 3,14,000 40,000 12,000 28,000
Material Receipts 90,000 750 150 600
Total 8,75,000
NUMERICAL (cont..)

●
Direct labour hour rate
method for absorption
You are required to of overhead costs.
compute per unit cost ●
Activity Based costing
for each product using-
technique for absorption
of overhead costs.
●
Comment on your result
Solution
1. Computation of product cost using labour hour
rate method the company’s overhead rate is
Rs.17.50 / hour if direct labour hour are used as
a base for assigning overheads costs. This rate
has been computed as follows:
Manufacturing overhead costs/ Direct Labour
hours
= Rs. 8,75,000/50,000 = Rs. 17.50 / hour
Solution (Cont..)
Using this rate the cost to manufacture each of the products is
given below:

Particulars Product
A B
Direct material 25 15
Direct labour 10 10
Manufacturing
overhead (2 hours * 35 35
17.50)
Total cost to 70 60
manufacture
Solution (Cont..)
2. Computation of product cost using activity base
costing
(a) Overhead rates by activity
Activity Traceable cost Total events or Rate / event or
transactions transaction
Machine set up 2,30,000 5,000 46 / set up
Quality inspections 1,60,000 8,000 20 / inspection
Production orders 81,000 6,000 135 / order
Machine-hours 3,14,000 40,000 7.85 / hour
worked
Material receipts 90,000 750 120 / receipt
Overhead cost /unit or product

Particulars Product A Product B


Events / Transactions Amount Rs. Events / Transactions Amount Rs.
Machine set up at 46 / set up 3,000 1,38,000 2,000 92,000
Quality inspections at Rs. 20 / 5,000 1,00,000 3,000 60,000
inspection
Production orders at Rs. 135 / 200 27,000 400 54,000
order
Machine hours worked at Rs. 12,000 94,200 28,000 2,19,800
7.85 / hour
Material receipts at Rs. 120 / 150 18,000 600 72,000
receipt
Total overhead cost assigned 3,77,200 4,97,800
(a)
No. of unit produced (b) 5,000 20,000
Overhead cost /unit (a)/(b) 75.44 24.89
Computation of total costs of
products
Particulars Activity Base Direct Labour Base
Product A (Rs.) Product B (Rs.) Product A (Rs.) Product B (Rs.)
Direct Materials 25 15 25 15
Direct Labour 10 10 10 10
Manufacturing
Overhead 75.44 24.89 35 35
Total Cost of
110.44 49.89 70 60
Manufacture
Comments
 In case of direct labour rate method the amount of
overhead charge would be Rs. 35 / unit for each
product , inspite of the fact that they have widely
different cost driving activities.
 Activity based costing is appropriate for charging
overhead costs to prevent any distortion in assigning
costs of products.
 Cost statement for product shows that as per activity
based costing the manufacturers overheads charged
to product A are almost 3 times of manufacturing
overhead charged to product B
Examples of Activities

1. Processing purchase orders.


2. Handling materials and parts.
3. Inspecting incoming material and parts.
4. Setting up equipment.
5. Producing goods using manufacturing
equipment.
6. Supervising assembly workers.
7. Inspecting finished goods.
8. Packing customer orders.
THANK YOU !!

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