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ACTIVITY-BASED COSTING - Coggle Diagram
ACTIVITY-BASED COSTING
WHAT IS ABC?
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Uses:
- Pricing
- Profitability/Performance
- Decision-making
WHY IT AROSE?
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TCS is volume driven, & high volume pulls
more cost -> not always correct
TCS is now weak because
- OHs are more dominant
- more products now
- more competition
- info isn't expensive to access
- more service orgs
TCS VS ABC
TCS
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allocates to cost centres, then ito DL or Machine Hrs
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ABC
allocates to activity cost centres, then ito cost drivers
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"activities" - aggregation of diff tasks, events or units of work, causing resource consumption
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DESIGNING A SYSTEM
Stage 2 - Assign costs to Activity Cost Centres
- keep as direct as possible
- allocate shared resources via 'resource cost drivers
Stage 3 - Select apt Drivers
- measurable, easy to obtain & identifiable w/ Gs
- Transaction Drivers - nr of times activity is done (least expensive but less accurate)
- Duration Drivers - time spent to do activity (more expensive but more accurate)
Stage 1 - ID Activities
- group similar tasks together
- Group too much -less accurate allocations
- Group too little - vast amt of data & costly
- activities w/ same driver should merge
Stage 4 - Assign activity costs to Gs
- based on Gs demand for the activity
- Stage 4 left out in Activity Based Mngmnt
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ACTIVITY HIERARCHIES
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1.Unit lvl
- volume related
- direct labour & material, energy costs, maintenance
- think volume cost drivers
2.Batch lvl
- setting up a machine, processing purchase order, production scheduling
- cost based on nr of batches
3.Product sustaining
- enables production & sale of individual Gs
- update prod. specs, tech support
.4.Facility sustaining
- head office costs
- unavoidable & irrelevant for decisions
"ABC Profitability Analysis"
- assigns all org expenses to a hierarchical lvl where cause-and-effect can be established
- IDs resource consumption impact by adding/dropping items at each lvl
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COST VS BENEFITS
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focus on customer, spot non-value adding activites