activity based costing - page 6
Keywords: ABC
By finil on 15/05/2009
Level: Master's degree (MA, MBA, MSc, MEng, MRes, MPhil etc)
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cost management purpose. In contrast, these same managers are now using the activity information to simplify or combine activities and are managing the cost drivers.
IMPLEMENTATION OF ACTIVITY BASED COSTING SYSTEM
1.Identify activities
This step requires the management accountant to acquire a familiarity with what is happening in the indirect areas of the organization. This has to be done systematically and may involve examining physical plans of the workplace and the payroll listings. This examination normally has to be supplemented by observation of work and particularly by a series of interviews with staff involved.
A number of criteria underlie the choice of activities. The activities should be at a reasonable level of aggregation. To break activities down into action and tasks is usually too detailed for product costing purposes. Such action and tasks are normally combined into large purpose-oriented activities.
The final choice of activities will be judgemental in any organisation. In some of the earlier reported cases the activity cost pools ran into hundreds while more recent cases tend to suggest that around twenty or thirty cost pools have become more common. The choice is between information details and the cost of setting up and operating the system.
Examples of Activities
Activity Cost driver
Production schedule changes Number of change orders
customer liaison Number of customers
purchasing Number of purchasing orders
production process set-up Number of set-ups
Quality control Number of inspections
Material handling Number of material movements
Maintenance Number of call-outs
2. Costing activities
After establishing the activity structure for the system it is necessary to identify the resources consumed by each individual activity during the relevent period. This provides a basis for identifying the level of cost in each pool. Both allocation and apportionment will be involved at this stage. In the absence oftime records, labour and equipment usage will have to be identified in broad terms by observation and interview. For other costs such as occupancy the most appropriate available measures of resource consumption should be use. Thus approximation and estimation are inherent in ABC system.
The activity cost information generated in this way has value in its own right. It represents what is often a novel profiling of overhead cost for management. Rather than analysing cost in terms of input type, it indicates how resources have been applied in the business. This provides another basis for assessing expenditure and identifying opportunities for cost reduction from the revealed pattern of expenditure and also from inter-plant and past period comparisons. Indeed some organization have developed their
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