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faaiz
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Activity-Based Costing - January 4th, 2008

Activity-Based Costing

read or print the entire Activity-Based Costing Concept Paper in PDF or HTML format
A powerful tool for measuring performance, Activity-Based Costing (ABC) is used to identify, describe, assign costs to, and report on agency operations. A more accurate cost management system than traditional cost accounting, ABC identifies opportunities to improve business process effectiveness and efficiency by determining the "true" cost of a product or service.
ABC principles are used: (1) to focus management attention on the total cost to produce a product or service, and (2) as the basis for full cost recovery. Support services are particularly suitable for activity-based resourcing because they produce identifiable and measurable units of output.
Why is Activity-Based Costing Important?
You can’t compete—or even begin to compare—until you know how to cost. ABC is a cost accounting methodology that can define processes, identify the cost drivers of those processes, determine the unit costs of products and services, and create reports on agency components that can be used to generate activity- or performance-based budgets.
A major advantage of using ABC is that it avoids or minimizes distortions in product costing that result from arbitrary allocations of indirect costs. Unlike more traditional line item budgets which can’t be tied to specific outputs, ABC generates useful information on how money is spent, if a department is cost-effective, and how to benchmark (compare oneself against others) for quality improvement.
Activity-Based Costing:
• Is a management tool that provides better allocation of resources
• Is applicable to both appropriations and revolving funds
• Relates total cost (resources consumed) to work accomplished (outputs produced)
• Aligns costs to outputs, thereby increasing cost visibility
• Is useful in forecasting financial baselines
The Unit Cost Formula
Activity-Based Costing uses cost drivers to assign the costs of resources to activities and unit cost as a way of measuring an output. Unit cost is the "average total cost" of producing one unit of output. It is calculated by dividing the total cost of production by the total number of units of output produced.
For example, if an automobile manufacturer produces 50 vehicles for a total cost of $1,250,000, then the cost-per-unit (vehicle) is $25,000.

Making clear connections between costs and outputs creates a truer financial picture. Costs that are visible and explicit are essential to wise allocation of resources. Total cost visibility takes into account all of the costs involved in producing and delivering a product or service. For example, military personnel, paid from a separate military pay appropriation account, were considered "free" assets. If military labor is required in a production process, the cost of military labor should be captured as part of the total cost associated with that production process—from the mechanic who repairs the vehicle to the finance clerk who processes a travel voucher. These are direct labor hours expended in order to meet a customer requirement.
The Four Steps to ABC Implementation
1. Identify activities—perform an in-depth analysis of the operating processes of each responsibility segment. Each process may consist of one or more activities required by outputs.
2. Assign resource costs to activities—this is sometimes called "tracing." Traceability refers to tracing costs to cost objects to determine why costs were incurred. DoD categorizes costs in three ways:
1. Direct—costs that can be traced directly to one output. Example: the material costs (varnish, wood, paint) to build a chair.
2. Indirect—costs that cannot be allocated to an individual output; in other words, they benefit two or more outputs, but not all outputs. Examples: maintenance costs for the saws that cut the wood, storage costs, other construction materials, and quality assurance.)
3. General & Administrative—costs that cannot reasonably be associated with any particular product or service produced (overhead). These costs would remain the same no matter what output the activity produced. Examples: salaries of personnel in purchasing department, depreciation on equipment, and plant security.
3. Identify outputs—identify all of the outputs for which an activity segment performs activities and consumes resources. Outputs can be products, services, or customers (persons or entities to whom a federal agency is required to provide goods or services).
4. Assign activity costs to outputs—assign activity costs to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputs’ consumption or demand for activities. For example, a driver may be the number of times an activity is performed (transaction driver) or the length of time an activity is performed (duration driver).
Activity-Based Costing encourages managers to identify which activities are value-added—those that will best accomplish a mission, deliver a service, or meet a customer demand. It improves operational efficiency and enhances decision-making through better, more meaningful cost information.
LearningLinks

go to LearningLinks for more about Activity-Based Costing
LearningLibrary
• Activity Based Cost Management: An Executive's Guide, by Gary Cokins, 2001.
• Activity Based Cost Management Making It Work: A Manager’s Guide to Implementing and Sustaining an Effective ABC System, by Gary Cokins, 1996.
• Activity Based Management: A Comprehensive Implementation Guide, by Edward Forrest, 1996.
• Common Cents: The ABC Performance Breakthrough, by Peter B. Turney, 1991.
• Driving Value Using Activity-Based Budgeting, by James A. Brimson, 1998.
• Using and Understanding Activity Based Costing
• Implementing Activity-Based Management in Daily Operations (Nam/Wiley Series in Manufacturing), by John A. Miller, 1995.
• Using Activity-Based Management for Continuous Improvement, by Tom Pryor, 2000 Edition
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Re: Activity-Based Costing - March 7th, 2008

I like this methode very much.Thanks dude for this post again
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Re: Activity-Based Costing - March 10th, 2008

Provide the link please. May be helpful for me...


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Re: Activity-Based Costing - October 5th, 2008

hey...dude..thanks..ur providing best explation abt abc
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thnk u soooooooooooooooooooooooooooooo veryyyyyyyyyyyyyyyyyyyyyy much.....................
twas of great help!!!!!!!!!!!!!!!!
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Re: Activity-Based Costing - April 19th, 2009

Hi,
I want a project on activity based costing of a real life organisation.

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Re: Activity-Based Costing - June 4th, 2009

Hi, Thank you for your valuable post, it will help us
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Re: Activity-Based Costing - February 18th, 2010

u r geneius mp
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Re: Activity-Based Costing - September 30th, 2013

thank you for your explanation
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Re: Activity-Based Costing - February 26th, 2016

Quote:
Originally Posted by faaiz View Post
Activity-Based Costing

read or print the entire Activity-Based Costing Concept Paper in PDF or HTML format
A powerful tool for measuring performance, Activity-Based Costing (ABC) is used to identify, describe, assign costs to, and report on agency operations. A more accurate cost management system than traditional cost accounting, ABC identifies opportunities to improve business process effectiveness and efficiency by determining the "true" cost of a product or service.
ABC principles are used: (1) to focus management attention on the total cost to produce a product or service, and (2) as the basis for full cost recovery. Support services are particularly suitable for activity-based resourcing because they produce identifiable and measurable units of output.
Why is Activity-Based Costing Important?
You can’t compete—or even begin to compare—until you know how to cost. ABC is a cost accounting methodology that can define processes, identify the cost drivers of those processes, determine the unit costs of products and services, and create reports on agency components that can be used to generate activity- or performance-based budgets.
A major advantage of using ABC is that it avoids or minimizes distortions in product costing that result from arbitrary allocations of indirect costs. Unlike more traditional line item budgets which can’t be tied to specific outputs, ABC generates useful information on how money is spent, if a department is cost-effective, and how to benchmark (compare oneself against others) for quality improvement.
Activity-Based Costing:
• Is a management tool that provides better allocation of resources
• Is applicable to both appropriations and revolving funds
• Relates total cost (resources consumed) to work accomplished (outputs produced)
• Aligns costs to outputs, thereby increasing cost visibility
• Is useful in forecasting financial baselines
The Unit Cost Formula
Activity-Based Costing uses cost drivers to assign the costs of resources to activities and unit cost as a way of measuring an output. Unit cost is the "average total cost" of producing one unit of output. It is calculated by dividing the total cost of production by the total number of units of output produced.
For example, if an automobile manufacturer produces 50 vehicles for a total cost of $1,250,000, then the cost-per-unit (vehicle) is $25,000.

Making clear connections between costs and outputs creates a truer financial picture. Costs that are visible and explicit are essential to wise allocation of resources. Total cost visibility takes into account all of the costs involved in producing and delivering a product or service. For example, military personnel, paid from a separate military pay appropriation account, were considered "free" assets. If military labor is required in a production process, the cost of military labor should be captured as part of the total cost associated with that production process—from the mechanic who repairs the vehicle to the finance clerk who processes a travel voucher. These are direct labor hours expended in order to meet a customer requirement.
The Four Steps to ABC Implementation
1. Identify activities—perform an in-depth analysis of the operating processes of each responsibility segment. Each process may consist of one or more activities required by outputs.
2. Assign resource costs to activities—this is sometimes called "tracing." Traceability refers to tracing costs to cost objects to determine why costs were incurred. DoD categorizes costs in three ways:
1. Direct—costs that can be traced directly to one output. Example: the material costs (varnish, wood, paint) to build a chair.
2. Indirect—costs that cannot be allocated to an individual output; in other words, they benefit two or more outputs, but not all outputs. Examples: maintenance costs for the saws that cut the wood, storage costs, other construction materials, and quality assurance.)
3. General & Administrative—costs that cannot reasonably be associated with any particular product or service produced (overhead). These costs would remain the same no matter what output the activity produced. Examples: salaries of personnel in purchasing department, depreciation on equipment, and plant security.
3. Identify outputs—identify all of the outputs for which an activity segment performs activities and consumes resources. Outputs can be products, services, or customers (persons or entities to whom a federal agency is required to provide goods or services).
4. Assign activity costs to outputs—assign activity costs to outputs using activity drivers. Activity drivers assign activity costs to outputs based on individual outputs’ consumption or demand for activities. For example, a driver may be the number of times an activity is performed (transaction driver) or the length of time an activity is performed (duration driver).
Activity-Based Costing encourages managers to identify which activities are value-added—those that will best accomplish a mission, deliver a service, or meet a customer demand. It improves operational efficiency and enhances decision-making through better, more meaningful cost information.
LearningLinks

go to LearningLinks for more about Activity-Based Costing
LearningLibrary
• Activity Based Cost Management: An Executive's Guide, by Gary Cokins, 2001.
• Activity Based Cost Management Making It Work: A Manager’s Guide to Implementing and Sustaining an Effective ABC System, by Gary Cokins, 1996.
• Activity Based Management: A Comprehensive Implementation Guide, by Edward Forrest, 1996.
• Common Cents: The ABC Performance Breakthrough, by Peter B. Turney, 1991.
• Driving Value Using Activity-Based Budgeting, by James A. Brimson, 1998.
• Using and Understanding Activity Based Costing
• Implementing Activity-Based Management in Daily Operations (Nam/Wiley Series in Manufacturing), by John A. Miller, 1995.
• Using Activity-Based Management for Continuous Improvement, by Tom Pryor, 2000 Edition
Hey faaiz, thanks for sharing such a nice article on the activity based costing and i really liked your article. Well, i have also got some important on the same topic and would like to share it with you. So please download my presentation and check it.
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