...Activity Based Costing Presentation by: Viraj Vaidya (12F353) & Nikhil Vanage (12F360) SCM Introduction Activity-based costing (ABC) is a costing methodology 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 costs (overhead) into direct costs compared to conventional costing. CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs. Aims of model With ABC, a company can soundly estimate the cost elements of entire products ACTIVITIES and services. That may help inform a company's decision to 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). In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services...
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...The implementation of Activity Based Costing (ABC) in Chinese refining manufacturers Table of contents 1. Introduction 2 1.1 Research background 2 1.2 domestic and foreign research status 4 1.2.1 Activity-based costing development process 4 1.2.2 Status quo of Activity-Based Costing Development and Application in China 6 1.3 research contents 8 2. Related theories 9 2.1concept of ABC 9 2.2 rationales 10 2.3 difference between ABC and traditional costing 12 2.3.1. Different calculating targets 12 2.3.2 Different calculation 12 2.3.3. Different Finished goods costs term 13 3. Research methodology 13 3.1 case study 13 3.2 The survey method 13 3.3 Literature 14 4. Research Results 14 4.1 problems of traditional costing method in oil refining enterprise 14 4.2suggestions for Chinese enterprises’ application ABC 15 Bibliography 15 1. Introduction 1.1 Research background With the rapid development of the national economy, enterprises’ competition is increasingly fierce; many companies are using advanced science and technology to achieve competitive advantage in the market. Market competition and technological progress are the two fundamental economic factors which generate activity-based costing. Since The beginning of 1980s of the 20th century, the activity based cost method is paid a wide range of attention; the developed countries gradually adopt it in a number of advanced enterprises...
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...analysis into the indirect cost.[3] In addition, activities include actions that are performed both by people and machine. However, as the percentages of indirect or overhead costs rose, this technique became increasingly inaccurate, because indirect costs were not caused equally by all products. For example, one product might take more time in one expensive machine than another product—but since the amount of direct labor and materials might be the same, additional cost for use of the machine is not being recognized when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another. ABC is based on George Staubus' Activity Costing and Input-Output Accounting.[4] The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s. During this time, the Consortium for Advanced Management-International, now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing.[5] Robin Cooper and Robert S. Kaplan, proponents of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional cost management systems. These traditional costing systems are often unable to determine accurately...
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...Research on U.S. Company in the service industry using ABC cost ACC525 - Managerial Accounting Iglobal University Submitted by: Urveshkumar Soni Submitted to: Prof. Mahmoud Elharazi, CPA ------------------------------------------------- Date: 08/01/2015 Activity-based costing (ABC) is a method for more precisely allocating overhead to those items that essentially use it. The structure can be used for the targeted reduction of overhead costs. ABC works best in difficult environments, where there are many machines and products, and twisted processes that are not easy to sort out. Equally, it is of less use in a efficient environment where production processes are abbreviated. (Activity Based Costing - AccountingTools. (n.d.)) Cost accounting defines several different systems of approaching the cost of producing certain products in the manufacturing industry, or finishing certain jobs in the service industry. Activity-based costing (ABC) is the most widely accepted and renowned method of cost accounting. ABC is based on the accounting theory that every output needs certain activities, and every activity requires certain resources. ABC is a two-step process that first allocates costs of resources to activities and then allocates activity costs to outputs. For example, a waiter makes a specific hourly pay and work for 10 tables in a single night. Under an ABC system every table will be assigned a cost subject on what fraction of an hour was required to...
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...Activity Based Costing By: Azalea McSwain ACC310: Cost Accounting 1 Instructor: Susan Paris Date: April 18, 2011 Outline I: Introduction a. What is Activity Based Costing b. How Does it Work II. Body a. What does ABC do for Firms b. How to develop the ABC system in a firm c. What are the Steps d. Examples III. Conclusion IV. References Abstract Activity Based Costing was developed in the manufacturing sector of the United States during the 1970’s and 1980’s. This system is used as a method for developing cost estimates in which projects were discrete or subdivided activities. ABC systems calculates the costs of individual activities and assigns costs to their related cost object such as products and services on the basis of the activities performed to produce each product. The Chartered Institute of Management Accountants (CIMA) technology defines ABC as “an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. (Edwards, 2006)” This paper will address what the ABC system does for firms which use it, how to develop such a system in a firm, the steps of the ABC system and some common examples. Activity Based Costing Introduction Activity Based Costing (ABC) addresses internal operating concerns of a firm and is an augmentation to the traditional ledger based cost management system. It doesn’t replace traditional accounting, but it makes use of the source documents provided from...
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...use of activity based costing (ABC) in Mauritian firms. INTRODUCTION: Traditional costing systems have worked well for many decades and may continue to be useful today to value inventory and measure the cost of goods sold. However, practitioners are facing various challenges using the traditional costing systems in today’s competitive environment. Cost and Management Accountants in a globalize world are now expected to be team players in such areas as product development, profitability analyses, quality process and improvements, and the evaluation of overall company performance (Welfle and Keltyka, 2000). As a strategic cost management tool, activity-based costing (ABC) plays a vital role. The ABC (activity-based costing) model has revolutionized costing systems (Johnson and Kaplan, 1987). The activity-based costing (ABC) is a method of analyzing business operations that leads to cost identification (e.g. direct cost and indirect cost) and cost classifications based on activities (Johnson and Kaplan, 1987). Implementation of ABC reduces costs and improves the resource allocation. It may result in improving resource allocation consistent with strategic objectives and budget surplus (Zaman, 2007). ABC has reportedly helped many organizations to better manage their business activities when combined with total quality management and business process re-engineering (Adams,1996) BACKGROUND The specific objective of my research is to determine how Activity Based Costing is used...
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...C H A P T E R F I V E INTRODUCTION TO COST MANAGEMENT Activity-Based Costing and Management After studying this chapter, you should be able to . . . 1. Explain the strategic role of activity-based costing 2. Describe activity-based costing (ABC), the steps in developing an ABC system, and the benefits and limitations of an ABC system 3. Determine product costs under both the volume-based method and the activity-based method and contrast the two 4. Explain activity-based management (ABM) 5. Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations 6. Use an activity-based approach to analyze customer profitability 7. Identify key factors for successful ABC/M implementation PART I Beware of little expenses. A small leak will sink a great ship. Benjamin Franklin This chapter has a lot to do with implementing the spirit of Benjamin Franklin’s observation—in cost management terms—that it really does matter how accurately you calculate a cost. Why? Having accurate costs is important for a variety of reasons: a company might find that it has a difficult time determining which of its products is most profitable. Alternatively, it finds its sales increasing but profits declining and cannot understand why. Perhaps the company keeps losing competitive bids for products and services and does not understand why. In many cases, accurate cost information is the answer to these questions. Accurate cost information provides a competitive...
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...INTRODUCTION TO COST MANAGEMENT Activity-Based Costing and Management After studying this chapter, you should be able to . . . 1. Explain the strategic role of activity-based costing 2. Describe activity-based costing (ABC), the steps in developing an ABC system, and the benefits and limitations of an ABC system 3. Determine product costs under both the volume-based method and the activity-based method and contrast the two 4. Explain activity-based management (ABM) PART I 5. Describe how ABC/M is used in manufacturing companies, service companies, and governmental organizations 6. Use an activity-based approach to analyze customer profitability 7. Identify key factors for successful ABC/M implementation Beware of little expenses. A small leak will sink a great ship. Benjamin Franklin This chapter has a lot to do with implementing the spirit of Benjamin Franklin’s observation—in cost management terms—that it really does matter how accurately you calculate a cost. Why? Having accurate costs is important for a variety of reasons: a company might find that it has a difficult time determining which of its products is most profitable. Alternatively, it finds its sales increasing but profits declining and cannot understand why. Perhaps the company keeps losing competitive bids for products and services and does not understand why. In many cases, accurate cost information is the answer to these questions. Accurate cost information provides a competitive advantage...
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...an organization contributing to the use of activity based techniques Activity Based Costing (ABC) is a costing methodology used to trace overhead costs directly to cost objects, i.e. products, processes, services, or customers. Costs are assigned to specific activities (e.g. engineering, manufacturing or purchasing) based on their use of resources and costs are assigned to cost objects based on their use of activities. ABC recognizes the causal relationship of cost drivers to activities. ABC techniques enable a business to decide which products, services, and resources are increasing their profitability, and which are contributing to losses. Certain organizations appear to be more successful in implementing ABC than others. ABC helps the managers in these organizations to make the right decisions regarding product mix, pricing, process improvements and product designs. Closer look reveals characteristics of an organization such as structure, product range or environment contributing to these successes. Cost Structure Where overhead costs comprises major portion of product costs as compared to direct costs such as direct labour and direct materials, correctly attributes overhead costs to product is highly important. In modern business, service departments plays a more and more important role than in the past in which production department is mainly responsible for key manufacturing activities. Overall product and service costs are more influenced by research, materials...
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...ACTIVITY –BASED COSTING (ABC) IN SERVICE INDUSTRIES Name: Ira Suri Date: April 23, 2016 Class Name: ACC 560: Managerial Accounting Professor Name: Professor Jones Olajide Abstract This paper explores Activity- based costing in Amazon Company, which is predominantly considered to be a forerunner in online retailing. It offers comprehensive range of products like books, CDs, videos, DVDs, electronics, toys, tools, home furnishings and housewares, apparel, and kitchen gadgets. It has evolved over the years and through this paper we shall evaluate how a time driven ABC cost system can be implemented in Amazon and how will it provide a competitive edge to the company in the market space it maneuvers in and subsequent impact of the business performance. Also, the paper will assess the latent impact of time- driven ABC costing on services provided online with those delivered through traditional channels. Amazon.com Amazon is one of the biggest online retailing companies, which deals in an innumerable collection of products like books, Cd.s, Dvd’s, shoes, clothing, home furnishings, hardware, music and what not. Amazon’s vision is to be globe's supreme consumer centric business; to construct an abode where individuals can uncover and discern everything they might desire to acquire online.” Amazon.com also retails goods from renowned dealers involving Virgin Wines, Hotwire, Toysrus.com Inc., Target, The Borders group, Circuit City Stores Inc., Waterstones, Expedia...
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...Health Specifics of the Activity-Based Applications in Hospital Management Boris Popesko * Tomas Bata University in Zlin, Czech Republic * Corresponding Author; Email: popesko@fame.utb.cz Abstract Paper analyses the specifics of the application of Activity-Based Costing method in hospital management. Primary objective of the paper is to outline the methodology of the ABC application in hospitals. First part of the paper analyzes the ways of ABC implementation in published foreign studies. Second part describes the individual steps in ABC application and discusses the differences in the application procedures between the manufacturing and hospital organization. Key words: Healthcare Management, Cost Management, Activity-based costing, Introduction In the last decade, many non-profit and hospital organizations started to face difficulties and challenges in balancing limited resources and costs to provide their demand for services. Due to the introduction of modern medical techniques and medicines and consequent increase of consumed costs, many hospitals are under pressure to adopt more advanced cost management techniques usually utilized only in profit organization sector. Hospital managers frequently seek the advanced techniques, for better understanding of relations between the cost and provided services. One of the key factors of effective company management is ability of accurate estimation of the cost of products. Product costing is an essential economic tool...
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...AND PROMOTING STRATEGY Activity-based Management – An Overview IN THIS BRIEFING… ctivity-based management and activity-based costing (ABM/ABC) have brought about radical change in cost management systems. ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing-International (CAM-I). No longer is ABM’s applicability limited to manufacturing organisations. The principles and philosophies of activity-based thinking apply equally to service companies, government agencies and process industries. The acronym itself has evolved from ABC to ABCM (activity-based cost management) to ABM, and the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organisations other than manufacturing. A Part 1 General FAQs Part 2 Practical guidance on implementing ABM ctivity-based costing and activity-based management have been around for more than fifteen years. Most forward-thinking companies have implemented them, or are in the process of doing so. A A A Part 3 Checklist Part 4 Further reading and bibliography BC is not a method of costing, but a technique for managing the organisation better. It is a one-off exercise which measures the cost and performance of activities, resources and the objects which consume them in order to generate more accurate and meaningful information for decision-making. ABM draws on ABC to provide management reporting...
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... | |Activity-Based Costing | |Product/Cost Relationships | | | | | | | | | 11/5/2007 Origin Activity Based Costing, or ABC for short, has been in use since the early 20th century. As the manufacturing industry became more complex, managers needed a way to keep a closer watch on manufacturing costs within the company. This in turn allowed them to more appropriately price their products, making them more competitive. (DirectoryM) By the 1980’s ABC had been in use for nearly 80 years, though it had...
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...the banking industry and subsequently the increased competition of the 1980s and continuing in the 1990s. The themes of the 1980s and 1990s include total quality management, customer satisfaction, cost, quality and time, technology, market globalization, availability of capital and markets, and finally activity based costing. The purpose of this study is to summarize and analyze the implementation of ABC in the banking industry. Total quality management (TQM) is a process of continuous improvement that focuses on increasing customer satisfaction. TQM is founded on the principle that every customer (internal or external) has a set of spoken or latent needs or requirements. The ultimate objective of TQM is to improve the horizontal linkage of operations to produce a product or service. ABC is a fundamental factor in implementing TQM. The implementation of TQM is greatly facilitated by analyzing organizational activities, linking activities to business processes, evaluating cost of quality (prevention, appraisal, and failure), and determining customer perception of value (valueadded activities). A value-added activity is required to meet customer requirements, modifies or enhances raw materials, is a critical step in getting the product or service to the customer, and adds value that customer might be willing to pay for. If the activity is determined to be a non-valueadded activity, one of four things should happen: activity reduction, activity elimination, activity sharing, and...
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...2010-023X Factors Influencing Activity-Based Costing Success: A Research Framework Zhang Yi Fei and Che Ruhana Isa becoming more and more popular [3-7] ABC aims to provide accurate costing information to managers to allocate activity costs to products and services by applying cost drivers [8]. Academics who advocate ABC, such as, Cooper and Kaplan [9], and Swenson [10] argue that it provides more accurate cost data needed to make appropriate strategic decisions about product mix, sourcing, pricing, process improvement, and evaluation of business process performance. These claims have led many firms to adopt ABC systems [8]. The benefits of ABC and its positive impact on firm’s performance motivated a numerous studies which examined various aspects of ABC. Among such studies are McGowan [11] who assessed the integrity of ABC success, Innes and Mitchell [4, 12] and Yanren [13] who conducted research on factors affecting ABC adoption, and Shield [3], Shields and McEwen [14], Gosselin [15] and Baired et al.[16, 17]who concentrated on factors influencing ABC success especially at the implementation stage. However, there is mounting evidence that suggests most of firms are experiencing problems in implementing ABC and, in some extreme cases, ABC implementation is not successful [3], which later resulted in abandoning the ABC systems altogether [15]. Questions arise as to why ABC implementation is successful in certain companies and fails in others. Based on the contingency theory, researchers...
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