ACTIVITY BASED COSTING D JAGANNATAN Cost

Transcript:ACTIVITY BASED COSTING D JAGANNATAN Cost:
ACTIVITY BASED COSTING D JAGANNATAN Cost Management System A cost management system (CMS) is a collection of tools and techniques that identifies how management’s decisions affect costs. Cost Management System The primary purposes of a cost management system are to provide... Cost Accounting Systems Cost accounting is that part of the cost management system that measures costs for the purposes of management decision making and reporting. Activity-Based Costing 4-5 yes Activity based costing allocates costs based on the discreet tasks (activities) that drive those costs. 4 Steps in the ABC Process Identify and classify the activities related to the company’s products or services. Estimate the costs associated with each activity. Calculate a cost-driver rate for each activity. Assign activity costs to products using the cost-driver rate. Identify and Classify Activities 1. UNIT-LEVEL ACTIVITES The work efforts that transform resources into individual products and resources 2. BATCH-LEVEL ACTIVITES Manufacturing or service technology that affect multiple units of activity equally and simultaneously 3.PRODUCT - LEVEL ACTIVITES Support specific products or service lines 4.CUSTOMER- LEVEL ACTIVITES Performed to meet the needs of specific customers 5.FACILITY-LEVEL ACTIVITIES Support all of the organizations processes COST DRIVER An appropriate cost driver base should: Have a cause-effect relationship with the activity and the use of resources (costs). Be feasible to measure. Predict or explain activities’ use of resources (cost) with reasonable accuracy. Be based on the practical capacity of the resources to support activities Cost drivers-contd. Activity cost drivers are the central innovation of activity-based cost systems They are also the most costly to measure Particularly the quantity of each activity cost driver used by each product Accordingly, it is important to understand the issues involved in selecting activity cost drivers The selection of an activity cost driver reflects a subjective trade-off between accuracy and the cost of measurement An ABC system with 50 activity cost drivers and 2,000 products would require that 100,000 data elements be estimated Cost drivers-contd. Because of the large number of potential activity-to-product linkages, management accountants attempt to economize on the number of different activity cost drivers Activities triggered by the same event may all use the same activity cost driver For example, preparing production orders, scheduling production runs, performing first part inspections, and moving materials may all use the number of production runs ABC system designers choose from three different types of activity cost drivers: Transaction Duration Intensity (direct charging) The