Activity based costing ABC Under ABC system product
Activity based costing (ABC) �Under ABC system, product cost is determined by obtaining a greater understanding of cost behaviour and using new measures of quantity of resources consumed by each product.
Characteristics of ABC �Traditional system of classifying overheads �Cost behaviour patterns are related to volume, diversity, events and time �Need to identify cost drivers
Steps in implementing ABC �Identify the functional areas �Identify the relative activities involved in each area �Collect accurate data on labour, material, and overhead cost �Allocate the common expenditure to various activities �Identify the most suitable cost driver �Establish the demand made by particular products �Absorb overhead expenses
Benefits of ABC �Determination of cost �Helps in improving performance �Helpful in strategic decision �Make or buy decision �Rationalising product mix �Formulating budgets �Helpful in target costing
Quality costing �Quality is the total composite of product and service characteristics of marketing, engineering, manufacturing and maintenance through which the product and service in use will meet the expectation by the customer. By- Armand V. Feigenbaum
Classification of quality costs Quality cost Cost of conformance Cost of non conformance Cost of lost opportunities
Total quality management �It is a dynamic process which emphasis on continuous improvement in effectiveness and efficiency of all business elements. The various attributes of quality such as performance, features, conformance, reliability should be constantly evaluated and upgraded so as to cope with the current and future market demands.
Value chain analysis �A firm is profitable if the value it creates exceeds the cost of performing value creation functions such as procurement, manufacturing, and marketing. �It includes: -Imbound logistics, operations, outbound logistics, marketing and sales, service.
Target costing �Target costing is defined as “a cost management tool for reducing the overall cost of a product over its entire life cycle with the help of production, engineering, research and design. ” �It involves: - defining the product ascertaining the economies allocating target to components identify the gap between target cost and initial projection
Life cycle costing �It involves estimation of product life cycle costs and the number of units to be produced and sold during that period so as to arrive at average cost per unit. �Features of life cycle costing: 1). Product have definite lives 2). Profit rise and fall different stages 3). Different threats and opportunities are created
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