Activity based cost/management gives a greater insight about the true costs in operations and gives an insight as to how to improve ways a business can be done. ABC/M does not only give costs based on class or division but also gives an overview from the process perspective. ABC/M gives much understanding to the managers about the processes involved.
In this report a introduction about the basic concepts of Activity based costing and management is briefly discussed. An example of the company will be taken( CAL Electronic systems) and a proper analysis will be done as to how the processes can be streamlined and better business decisions can be taken with the analysis hence done.
Also the key learning’s will be discussed at the end of the report and outcomes of the decisions hence taken will be briefly discussed. Proper conclusions will be given about the viability the discussed methods.
Fundamentals of ABC/M Concepts5
CAL ELECTRONIC CIRCUITS6
One of the premier tools in order to refine a costing system is activity system is activity-based costing. Activity based costing (ABC) systems fine tunes costing systems by focusing on individual activities which act as the fundamental cost objects. An activity can be an event, task, or unit of work which has a definite and specified purpose; Examples can be designing various products, setting up various machines, operating different machinery, distributing products, setting up machines, operating and distributing products.
ABC systems will help us to calculate the costs of individual activities which are involved and assign costs to various cost objects such as products and services on the basis of the activities of the activities undertaken to produce each product or service
An activity is a process or procedure that completes our work. With Regards to ABC, by activities we understand that the activities which supports service departments, such as, material handling, machine set-up, engineering change, quality testing, inspection, etc.
This means that ABC widely differs from the traditional system with respect to allocation of overhead or indirect costs. Direct costs are identified with, or assigned to, the cost object, in the same manner as done in case of traditional costing system. Overhead costs are linked to the cost objects based on activities
The focus of activity-based costing (ABC) is to assign all costs – direct and indirect – to the processes that characterize an organization. ABC has its origins in the need for organizations to identify the full cost of creating specific outputs
In a normal language, ABC requires the following steps:
a) Defining the processes used within an organization;
b) Creating an Activity Dictionary that translates processes into specific steps against which employees may record time;
c) Collecting information on the time spent on each activity by each employee;
d) Calculating the annual time spent across the organization in each activity; and then, using salary information to place a value on each activity.
Fundamentals of ABC/M Concepts
ABC/M is comprised of two components: Activity-Based Costing (ABC) and Activity-Based Management (ABM). ABC is not a financial accounting system, but an approach that provides a more effective way to view and interpret information by measuring the cost and performance of business processes and their outputs. ABM is...