BBA Cost Accounting Topic wise Study Material Of Activity Based Costing

Bba Cost Accounting Topic wise Study Material Of Activity Based Costing

Activity Based Management

The focus in an activity based management (ABM) system is not only to calculate cost, but also to facilitate management of the organisation via an understanding of the activities and processes of which they from a part. Cost can, to a certain extent, be managed by managing the causes of cost or the activity levels. ABM refers to the management philosophy that focuses on the planning, execution and measurement of activities as the key to competitive advantage. The ABM is a much broader than ABC. Its aim is to use information generated by ABC, for effective business process and profitability.

Bba Cost Accounting Topic wise Study Material Of Activity Based Costing

Activity Based Accounting

Activity based accounting (ABA), is an extension of activity based costing concept, which involves in “collection, recording, analysis, controlling and reporting of activity related costs rather than departmental or cost centre related costs”. Activity based accounting deals with collection of financial and operational performance information about significant activities, and identifying the causal factors or activity cost drivers. Activity based accounting includes the following:

  • Activity based costing for costing of products and services.
  • Activity based budgeting.
  • Activity cost management used for planning and control.
  • Activity performance measurement for performance monitoring through financial and non – financial indicators.
  • Reducing the number of vendors reduces purchasing activities related qualifying vendors, negotiating contracts, and the like.
  • Reducing the number of parts in a product reduces assembly activity.
  • Reducing the number of engineering change orders reduces the amount of rework activity, and
  • Reducing set- up times reduces machine set-up activity.

A major benefit of activity accounting is that managers are forced to view operations as the management of activities, not cost. 

Summary

  • Under traditional cost system, direct costs are the traceable costs allocated to the units of output in proportion to the volume of production. The indirect costs or overheads are apportioned to different cost centers and absorbed into costs of production by applying the overhead recovery rates like machine hour rate, labour hour rate, percentage of direct material, percentage of direct labour etc.
  • The advance automated technology has caused to increase the indirect costs over the cost of input items and the conventional cost system has failed to ascertain the accurate cost of a product.
  • Due to increase in competition, strategic planning has gained importance, that leads the necessity to ascertain the profitability and cost of each segment, division, unit, customer class, geographical area etc. therefore , the activity based costing has emerged to replace the tradition cost system.
  • The basic concept of ABC is to ascertain the more accurate product cost by redesigning the allocative system of support overheads like inspection, dispatch, set – up, tooling, stores, purchases, etc.
  • ABC is defined as cost attribution to cost units on the basis of benefit received from indirect activities. It required to trace the significant activities in the organisation and attempts to absorb the costs of such activities into product cost on the basis of benefit received by such unit.
  • Under ABC, costs are grouped according to what drives them or causes them to be incurred. The cost drivers are then used as an absorption rate.
  • Under ABC, cost pools are created for each activity and such activities are related with each type of product to determine the cost of such product.
  • The activity cost driver rates are identified as means of tracing the cost of each activity to the product cost.
  • The basic objective of ABC is to improve the accuracy of product cost by carefully changing the type and number of factors used to assign costs.
  • Cost drivers are used to trace costs to products by using a measure of resources consumed by each activity.
  • Cost object is the final point to which costs are traced. The cost objects are linked to the objective of the organisation. Cost object is the reason for performing an activity. Cost objects include products, services, customers, products, contracts etc.
  • ABC is the most appropriate method in developing the management information. System and to ascertain the realistic costs of different product lines, customers, responsibility centers , location etc.
  • ABC is a complex system which can be beneficial to the large business organisations. The implementation of ABC system involves substantial installation and operating costs and requires trained professionals.
  • ABC information system can effectively be used in managerial decision making at operational or strategic level.
  • Activity based cost management is a planning and control system used for continuous improvement by setting up of budgets based on activity analysis and use of cost pools and cost drivers.
  • Activity based management refers to the management philosophy that focuses on the planning, execution and measurement of activities as the key to the competitive advantages.
  • Activity based accounting deals with collection, recording, analysis, controlling and reporting of activity related costs rather than departmental or cost centre related costs.

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