Archive for 2012

Manufacturing Costing with and without Activity Based Costing (Examples)

By | Published Saturday, May 26, 2012



Let’s calculate the activity based costing of the same product with two different manufacturing activities. In the first activity the firm has set up a machine to run and produce the batches of the product. In the other manufacturing activity the production is done by producing specific units of the product. Let’s assume that the annual over head production cost of the company is $2,000,000. Out of this total coast about $ 2, 00,000 is spent in actually setting up the machines involved in production. Each year company sets up almost 400 machines to complete the production.
The cost involved in each setup can be calculated as follows
Setup cost = Total Set up Cost/ Number of machine setups
Setup Cost = 2, 00,000/ 400
Setup Cost per machine= $500
This overhead will be viewed as the batch level cost or the cost of the Stage 1 of the production. This cost is first assign to produce the batches of the product then it will assign to produce the units of the product. This will be called as the Stage No 2 of the cost allocation. Now let’s assume that a batch consists of 5000 units of products the overhead cost associated with setup for each unit can be calculated as follows:-
Setup Cost for each unit = Setup Cost of a Machine/ Number of unites produced by that machine
Setup Cost for each unit= 500/ 50,000
Setup cost per unit = $0.10
Now let’s have a look that cost of over head allocation to the manufacturing is done with activity based modal and without activity bases modal.



With Activity Base Costing
Without Activity Based Costing
Overhead costs involved in setups
$2,00,000
$0
Number of Setups
400
Not available
Cost per setup
$500
$0



Total overhead mfg cost
$,2000,000
$2,000,000
Machine Setup Cost
200,000
0
Overhead cost on machine hours
$1,800,000
$2,000,000
Machine Hours
100,000
100,000
Overhead cost per Machine hour
$18
$20



Over head cost allocation
$500 setup cost +$18 per MH
$20 PER Machine Hour

Now let’s calculate over head cost of setup associated with each unit produced. This cost is calculated for a batch of 5000 units.

With Activity Base Costing
Without Activity Based Costing
Overhead in setting up machine
$500
$0
Number of Units in batch
5000
Not available
Overhead per unit by setup
$.10
Not Available



Overhead cost per Machine hour
$18
$20
Number of units / MH
50
50
Over head cost per unit
$0.36
$0.40
Total Over head cost per unit
$0.46
0.40

Now the tables show that overhead cost calculated by activity based costing is greater as compared to calculated by traditional costing method. This means activity based costing method is more accurate and precise.

Posted in | Leave a comment

Limitations of implementing Activity Based Costing Modal

By



Implementation of activity based modal solely depends on the capture of required data at a given period of time. The accusation of data at such a scale results in the slow performance of operations, processes and administrations in an organization. A large amount of the time of the employees is consumed in gathering data and calculating a particular portion of the total manufacturing cost. In Activity based modal it is sometimes difficult to trace costs such as it is difficult to assign the portion of chief executive salary that is involved in the production of a certain product. Such costs are called as business sustaining costs and not involved in activity based costing modal as there is no meaningful method to calculate them. 
Another limitation of the activity based accounting is that it is a relatively costly method of calculating cost.  While the cost related elements are calculated and gathered manually the completeness and the comprehensiveness of the method of activity based costing will be poor. In order to reduce the implementation cost of the activity based model it is recommended that the data must be captured through traditional accounting systems and then lead to the desired activity based costing modal to calculate actual costs associated with products or services.
Activity based costing requires special engineering, testing modules, machine set ups and other activities that are more costly as compared to the traditional accounting system.  
There is no evidence of the success of implementation of methodology in the public administration sector other than justifying the existing budget strategies. Another disadvantage of activity based costing is that it makes every waste and mistake visible and hence proves alarming system for a number of executives and administrators. Complexity is another issue that makes activity based costly modal not easy to implement. For a number of employees and administrators activity based system remains difficult to operate and comprehend. Activity based costing modal requires much of the organization resources in terms of employees, time and funds as a result it proves too costly to implement.

Posted in | Leave a comment

Application of Activity Based Costing Method in Business

By



The concept of activity based costing is applicable to the accounting, finance and the costing departments of the company. In most of the business cases activity based modal is used as a full scope however in some cases it an be used as partial scope. One of the most beneficial application of the activity based costing modal is that it is used to identify inefficient products, departments and operations. With the help of this modal a company can allocate more resources to the departments, products and operations that prove to be profitable to the business. Another useful aspect of the activity based costing modal is that it is used to control the costs at some pre-production level as well as at the department level. It intelligently identifies the extra and unnecessary costs and helps the organization to eliminate those costs. With the help of activity based costing modal the upper management can fix the price of a product or service in accordance with any analytical decision. 

Other aspects of the usefulness of activity based costing technique are that it ensures a better management of cost and resource allocation. It also helps in measuring the budgeting and the performance level of an organization. Activity based modal is a mew innovation and helps in calculating the costs more accurately. With the help of this modal an organization may ensure the profitability of a product or a service. The modal also helps in justifying the resource allocations in new projects by using the new technologies. Activity based costing also aims to manufacture a better product by enhancing process design and hence it ensures product quality as well. With the assistance of activity based costing modal a firm is able to handle competition and cop competing firms with more sensibility. 

Another factor that goes in the favor of the implementation of activity based costing is that it creates cost conscious behavior among the employees as a result it triggers behavioral incentives among the employees. The modal also responds to the increase the over heads at any level of the production. Moreover it also supports other sort of management innovative techniques such as JIT and TQM.

Posted in | Leave a comment

How to Use Activity Based Costing Method

By



Implementing activity based costing method in a firm is not an easy and simple task. You can not say that implementing activity based costing is as easy as ABC. In order to implement activity based costing in a business all activities of the business are needed to be broken down at discrete level. For example in order to implement activity based costing a company has to divide its purchasing activity into a number of discrete steps such as negotiation with suppliers, make changes at their end such as updating the database, issuing purchase orders and managing complaints both from the suppliers and the customers. 

Large companies use pilot scheme in order to implement activity based costing in their business.  Pilot scheme involves the hiring of the consultants that implement the concept of ABC in a given organization or firm. The consultants will analyze all the operations of the firm and will take a number of new measurements to calculate activity based costing for every product. The consultants are specialized in taking measurements and implementing the activity based costing modal on the bases of these measurements. 

Activity based modal uses an approach in which costs are assessed in a step by step manner. The basic step is to start from the processes then to assess cost and at the last manage the capacity at various levels of assessing costs.
Resources
 
Activity Based Costing Modal
Every Thing in Organization

 


What is actually being done
             Objects
 
                                                           Consume       
Products, Services, Customers

Activity based costing helps to segregate the fixed costs, variable costs and the over head costs. Such a spilt of the three costs associated with the production helps in identifying the cost drivers associated with each type of cost. The easy approach to implement activity based costing in the existing system is to use activity based costing software along with the routine accounting software of the organization. Activity based costing software can be called when some extra information about the costing is required to make a decision.

Posted in | Leave a comment

Search Examples and Formula's

Advertisement

Join Us on Facebook

Accounting for Management - Accounting theme from Business Law.