Standard Cost Accounting Overview of cost definitions and costing methods by James Ruth ([email protected]) 1. Cost Definitions Cost: The total money, time, and resources associated. Review of Production and Cost Concepts Thursday - September 23, 2004 OUTLINE OF TODAY’S RECITATION 1. The Production function: brief review of production. Activity- based costing - Wikipedia, the free encyclopedia. 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. Activity Based Costing Topic Gateway Series 3 Activity based costing Definition and concept TARGET COSTING AND THE PRODUCT DEVELOPMENT CYCLE. Standard Costing:The complete concept. Share; Like; Download Ashutosh Mishra, Content Analyst. 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 provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives. Prevalence. An independent 2. ABC was an inefficient use of resources: it was expensive and difficult to implement for small gains, and a poor value, and that alternative methods should be used. For example, one product might take more time in one expensive machine than another product. CONTRACT COSTING (1) Contract costing Contract costing, also known as Terminal costing, is a form of specific order costing which applies where work is. 2 PROCESS COSTING JUNE 2011 Equivalent units This refers to a conversion of part-completed units into an equivalent number of wholly-completed units. Management Accounting Concepts and Techniques. Dennis Caplan, University at Albany. Activity-based costing. Allocation of service department costs. Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the. 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. 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. Kaplan, proponents of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1. 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 the actual costs of production and of the costs of related services. Consequently, managers were making decisions based on inaccurate data especially where there are multiple products. Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products. Activity- based costing was first clearly defined in 1. Robert S. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost. Like manufacturing industries, financial institutions have diverse products and customers, which can cause cross- product, cross- customer subsidies. Since personnel expenses represent the largest single component of non- interest expense in financial institutions, these costs must also be attributed more accurately to products and customers. Activity based costing, even though originally developed for manufacturing, may even be a more useful tool for doing this. Drucker in the book Management Challenges of the 2. Century. Activity- based costing records the costs that traditional cost accounting does not do. The overhead costs assigned to each activity comprise an activity cost pool. Alternatives. However lean accounting is a snapshot concept for capturing just partial derivatives or differentials of selected cost functions. Lean accounting takes an opposite direction from ABC by working to eliminate peculiar cost allocations rather than apply complex methods of resource allocation. Lean accounting is primarily used within lean manufacturing. The approach has proven useful in many service industry areas including healthcare, construction, financial services, governments, and other industries. Application of Theory of constraints (TOC) is analysed in a study. Identifying cost drivers in ABC is described as somewhat equivalent to identifying bottlenecks in TOC. However the more thorough insight into cost composition for the inspected processes justifies the study result: ABC may deliver a better structured analysis in respect to complex processes, and this is no surprise regarding the necessarily spent effort for detailed ABC reporting. Methodology. ABC helps to segregate. The split of cost helps to identify cost drivers, if achieved. Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the activity. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions (cost driver) takes at the counter and then by measuring the number of each type of transaction. For the activity of running machinery, the driver is likely to be machine operating hours. That is, machine operating hours drive labor, maintenance, and power cost during the running machinery activity. Application. ABC is applicable throughout company financing, costing and accounting: ABC is a modeling process applicable for full scope as well as for partial views. ABC helps to identify inefficient products, departments and activities. ABC helps to allocate more resources on profitable products, departments and activities. ABC helps to control the costs at any per- product- level level and on a departmental level. ABC helps to find unnecessary costs that may be eliminated. ABC helps fixing the price of a product or service with any desired analytical resolution. A report summarizes reasons for implementing ABC as mere unspecific and mainly for case study purposes. Such extension, however requires a degree of automatic data capture that prevents from cost increase in administering costs. Implementation. On the other hand, they undescore the importance to consider the cost of capital in order to bring strategy back into performance measures. Limitations. That drives the prevalence to slow processes in services and administrations, where staff time consumed per task defines a dominant portion of cost. Hence the reported application for production tasks do not appear as a favorized scenario. Tracing Costs. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed. Although some may argue that costs untraceable to activities should be . Therefore, there is no reason to assign any cost in an arbitrary manner. Transition to automated Activity- based costing accounting. Known approaches for event based accounting simply show the method for automation. Any transition of a current process from one stage to the next may be detected as a relevant event. Paired events easily form the respective activity. The state of the art approach with authentication and authorization in IETF standard RADIUS gives an easy solution for accounting all workposition based activities. That simply defines the extension of the Authentication and Authorization (AA) concept to a more advanced AA and Accounting (AAA) concept. Respective approaches for AAA get defined and staffed in the context of mobile services, when using smart phones as e. Activity Costing and Input- Output Accounting (Richard D. Irwin, Inc., 1. 97. Consortium for Advanced Manufacturing- International^Kaplan, Robert S. Accounting and Management: A Field Study Perspective (Harvard Business School Press, 1. ISBN 0- 8. 75. 84- 1. Sapp, Richard, David Crawford and Steven Rebishcke ? New York: Harper Business, 1. Who Wins in a Dynamic World: Theory of Constraints Vs. Activity- Based Costing?^The design and implementation of Activity Based Costing (ABC): a South African survey^Velmurugan, Manivannan Senthil. Business Source Complete. Mocciaro Li Destri A., Picone P. Management Challenges of the 2. Century. New York: Harper Business, 1. Activity Based Costing . Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities. Let's discuss activity based costing by looking at two products manufactured by the same company. Product 1. 24 is a low volume item which requires certain activities such as special engineering, additional testing, and many machine setups because it is ordered in small quantities. A similar product, Product 3. If this company used traditional costing, it might allocate or . This will result in little overhead cost allocated to Product 1. However, it did demand lots of engineering, testing, and setup activities. In contrast, Product 3. The result will be a miscalculation of each product's true cost of manufacturing overhead. Activity based costing will overcome this shortcoming by assigning overhead on more than the one activity, running the machine. Activity based costing recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs—they cause the company to consume resources. Under ABC, the company will calculate the cost of the resources used in each of these activities. Next, the cost of each of these activities will be assigned only to the products that demanded the activities. In our example, Product 1. Other products that use any of these activities will also be assigned some of their costs. Product 3. 66 will not be assigned any cost of special engineering or special testing, and it will be assigned only a small amount of machine setup. Activity based costing has grown in importance in recent decades because (1) manufacturing overhead costs have increased significantly, (2) the manufacturing overhead costs no longer correlate with the productive machine hours or direct labor hours, (3) the diversity of products and the diversity in customers' demands have grown, and (4) some products are produced in large batches, while others are produced in small batches. New! We just released our 2. Managerial & Cost Accounting Insights. This PDF document is designed to deepen your understanding of topics such as product costing, overhead cost allocations, estimating cost behavior, costs for decision making, and more. It is only available when you join Accounting. Coach PRO. Activity Based Costing with Two Activities. Let's illustrate the concept of activity based costing by looking at two common manufacturing activities: (1) the setting up of a production machine for running batches of products, and (2) the actual production of the units of product. As companies began measuring the costs of activities (instead of focusing on the accountant's departmental classifications), they began using ABC cost information to practice activity based management.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. Archives
December 2016
Categories |