TOPIC: ACTIVITY-BASED COSTING

INTRODUCTION: Activity-based costing is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect cost into direct costs compared to conventional costing models.

Aims of model

With ABC, an organization can soundly estimate the cost elements of entire products and services. That may prepare decisions on

§ either identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)

§ Or identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim).

DISCUSSION

Application in routine business

ABC has proven its applicability beyond academic discussion. ABC is applicable throughout company financing, costing and accounting:

§ ABC is a modeling process applicable for full scope as well as for partial views.

§ ABC helps to identify inefficient products, departments and activities.

§ ABC helps to allocate more resources on profitable products, departments and activities.

§ ABC helps to control the costs at any per-product-level level and on a departmental level.

§ ABC helps to find unnecessary costs that may be eliminated.

§ ABC helps fixing the price of a product or service with any desired analytical resolution.

REASONS FOR IMPLEMENTING ABC

Better Management

Budgeting, performance measurement

Calculating costs more accurately

Ensuring product /customer profitability

Evaluating and justifying investments in new technologies

Improving product quality via better product and process design

Increasing competitiveness or coping with more competition

Management

Managing costs

§ Providing behavioural incentives by creating cost consciousness among employees

§ Responding to an increase in overheads

§ Responding to increased pressure from regulators

§ Supporting other management innovations such as TQM and JIT systems

LIMITATIONS

Applicability of ABC is bound to cost of required data capture. That drives the prevalence to slow processes in services and administrations, where staff time consumed per task defines a dominant portion of cost.

CONCLUSION

We conclude that Beyond such selective application of the concept, ABC may be extended to accounting, it has full scope of cost generation in departments or along product manufacturing. Such extension however requires a degree of automatic data capture that prevents from cost increase in administering costs.

SUBMITTED BY:

RENU

CLASS-MBA-1^ST SEM

SECTION-C