PPT: Activity Based Costing | Cost and Management Accounting for CA Intermediate PDF Download

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Page 2


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Learning Objectives
? Concept of Activity Based Costing (ABC)
? Significant Terms: Cost Objectives, Activities, Cost Pool
and Cost Drivers
? Steps Involved in ABC
? Use of Activity Based Information
? Activity Based Costing Vs. Trading Costing
? Solved Practical Problem
? Practice Questions with Answer
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Page 3


1
Learning Objectives
? Concept of Activity Based Costing (ABC)
? Significant Terms: Cost Objectives, Activities, Cost Pool
and Cost Drivers
? Steps Involved in ABC
? Use of Activity Based Information
? Activity Based Costing Vs. Trading Costing
? Solved Practical Problem
? Practice Questions with Answer
2
Traditional Method of Absorption
? In traditional method of overhead absorption, a
general or blanket rate is used, which is volume based.
For example:
? Factory overheads as a percentage on direct
material/direct labour or prime cost,
? Labour hour rate or machine hour rate.
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Page 4


1
Learning Objectives
? Concept of Activity Based Costing (ABC)
? Significant Terms: Cost Objectives, Activities, Cost Pool
and Cost Drivers
? Steps Involved in ABC
? Use of Activity Based Information
? Activity Based Costing Vs. Trading Costing
? Solved Practical Problem
? Practice Questions with Answer
2
Traditional Method of Absorption
? In traditional method of overhead absorption, a
general or blanket rate is used, which is volume based.
For example:
? Factory overheads as a percentage on direct
material/direct labour or prime cost,
? Labour hour rate or machine hour rate.
3
Concept of Activity Based Costing (ABC)
? According to Cooper and Kalpan, “ A BC (Activity based
costing) system calculate the costs of individual activities
and assign costs to cost objects such as products and
services on the basis of activities undertaken to produce
each product or service. ”
? Activity based costing (ABC) is a method of assigning (or
absorbing) overheads to end products and services on the
basis of benefits received by the products and services from
indirect activities, instead of using a blanket rate of
absorption. Production activities are divided into major
activities, which are used as a cost centers. Overheads cost
are pooled at these center and then overhead rates are
calculated per activity. And then these rates are applied to
charge overheads to end products.
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Page 5


1
Learning Objectives
? Concept of Activity Based Costing (ABC)
? Significant Terms: Cost Objectives, Activities, Cost Pool
and Cost Drivers
? Steps Involved in ABC
? Use of Activity Based Information
? Activity Based Costing Vs. Trading Costing
? Solved Practical Problem
? Practice Questions with Answer
2
Traditional Method of Absorption
? In traditional method of overhead absorption, a
general or blanket rate is used, which is volume based.
For example:
? Factory overheads as a percentage on direct
material/direct labour or prime cost,
? Labour hour rate or machine hour rate.
3
Concept of Activity Based Costing (ABC)
? According to Cooper and Kalpan, “ A BC (Activity based
costing) system calculate the costs of individual activities
and assign costs to cost objects such as products and
services on the basis of activities undertaken to produce
each product or service. ”
? Activity based costing (ABC) is a method of assigning (or
absorbing) overheads to end products and services on the
basis of benefits received by the products and services from
indirect activities, instead of using a blanket rate of
absorption. Production activities are divided into major
activities, which are used as a cost centers. Overheads cost
are pooled at these center and then overhead rates are
calculated per activity. And then these rates are applied to
charge overheads to end products.
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Significant Terms
? Cost Objects: Generally the products are cost objects, but
Customers, services or locations may also be the cost
objects.
? Activities: Activities are of two types: (a) Production
activities, like manual and mechanical process, assembly
and (b) Support Activities, like, purchase, storage, repairs
and maintenance, etc.
? Cost Pool: Cost pool is an activity cost center at which
costs are pooled.
? Cost Drivers: Cost driver may be defined as a factor or
cause for incurrence of overhead costs. For example:
machine our, number of purchase orders, number of set-
ups, etc.
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