Activity Based Costing

PowerPoint Diagram Pack Activity Based Costing Activity Based Costing (ABC) analysis is a methodology for assigning costs to those activities that truly drive these costs. It is more accurate than traditional costing methods. ABC is an invaluable tool for making strategic decisions, as it allows you to develop a picture of true profitability of product lines, customer segments, geographies, distribution channels, and other markets. This document explains a 7-phase approach to ABC. ,[object Object],[object Object],[object Object],General Ledger (Cost Centers) Resource Cost Pool 1 Resource Cost Pool 2 Resource Cost Pool 3 Resource Cost Pool 4 Activity Cost Pool A Activity Cost Pool B Activity Cost Pool C Markets Geography Distribution Channel Products Customers

Contents ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Activity Based Costing is a technique used to develop more accurate costs in support of strategic decisions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

In ABC, costs are logically mapped and allocated to specific cost objects ,[object Object],Activity Based Costing (ABC) Traditional Costing Methods General Ledger (Cost Centers) Resource Cost Pool 1 Resource Cost Pool 2 Resource Cost Pool 3 Resource Cost Pool 4 Activity Cost Pool A Activity Cost Pool B Activity Cost Pool C Markets Geography Distribution Channel Products Customers General Ledger (Cost Centers) Product A Product B Product C Product D Volume-based indirect cost allocations THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

ABC ensures fact-based strategic decisions ,[object Object],Activity Based Costing ensures you make fact-based strategic business decisions. THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ ABC can be used as a financial analysis tool to help value alternatives, which have been identified through other means (e.g. incremental costs of adopting a differentiation strategy, making near-custom products for its customers)  ABC can be used in benchmarking and process improvement, as well as “direct-setting” and performance measurement regarding products, channels, and customers  ABC can facilitate decisions at the “cost object” level (e.g. drop a product line; don’t serve costly segments), at the behavioral / operational level (e.g. institute minimum order quantities; change batch sizes), and at the process level (e.g. improve processes, reduce cost per setup or cost per order)  ABC allows fact-based, profit-oriented decisions to be made (e.g. significant fraction of a firm’s customers might actually be unprofitable, even though the overall firm may be profitable)  ABC is useful for more accurate strategic decisions in complex, high overhead environments, since strategic decisions require costs estimates by product or customer 

Activity Based Costing can be performed through a 7-phase process ,[object Object],Develop Cost Objects Group Cost Objects Develop Process Maps Identify Cost Elements Map GL Costs Allocate Costs Verify Economic Logic 1 2 3 4 5 6 7 THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Phase 2 Develop groupings of cost objects ,[object Object],Develop Cost Objects Group Cost Objects Develop Process Maps Identify Cost Elements Map GL Costs Allocate Costs Verify Economic Logic ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

Phase 4 Review financial statements to identify major elements of cost ,[object Object],Develop Cost Objects Group Cost Objects Develop Process Maps Identify Cost Elements Map GL Costs Allocate Costs Verify Economic Logic ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],If this level of detail is not available, it will become much more difficult to get an accurate ABC estimate ABC seeks to assign these costs to activities—then, assign the cost associated with activities to individual cost objects. 1 2 THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

Phase 4 (cont.) ,[object Object],Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX Cost item $XX General Ledger (Cost Centers) Resource Cost Pool 1 Resource Cost Pool 2 Resource Cost Pool 3 Resource Cost Pool 4 Activity Cost Pool A Activity Cost Pool B Activity Cost Pool C Markets Geography Distribution Channel Products Customers ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Develop Cost Objects Group Cost Objects Develop Process Maps Identify Cost Elements Map GL Costs Allocate Costs Verify Economic Logic THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

Phase 5 Map overhead/general ledger resource costs to activities ,[object Object],Develop Cost Objects Group Cost Objects Develop Process Maps Identify Cost Elements Map GL Costs Allocate Costs Verify Economic Logic ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],1 2 3 THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

[object Object],Phase 5 (cont.) General Ledger (Cost Centers) Resource Cost Pool 1 Resource Cost Pool 2 Resource Cost Pool 3 Resource Cost Pool 4 Activity Cost Pool A Activity Cost Pool B Activity Cost Pool C Markets Geography Distribution Channel Products Customers Develop Cost Objects Group Cost Objects Develop Process Maps Identify Cost Elements Map GL Costs Allocate Costs Verify Economic Logic ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

Let’s walk through an example where we evaluate the financials of a manufacturer of “Gadgets” and “Gizmos” ,[object Object],[object Object],[object Object],[object Object],[object Object],Our simple analysis shows that we are making a nice profit from Randy, but not on the other 2 customers THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],COMPANY BACKGROUND INFO / FINANCIALS ,[object Object],[object Object],CUSTOMER FINANCIALS $595 $8.70 50 $1.60 100 Randy $1,505 $8.00 140 $0.55 700 Ron $400 $12.00 10 $1.40 200 Rick Price Volume Price Volume Revenue Gadgets Gizmos Customer $320 ($35) $15 Profit $275 $1,540 $385 Cost 150 840 210 Units $595 $1,505 $400 Revenue Randy Ron Rick

Looking at only product profitability data, we already see a more accurate reflection of our customer profitability analysis … ,[object Object],Rick Ron Randy Note the sizeable shift in profitability between Rick and Randy Compare this to the results from the simple profitability analysis… Driven by product profitability data THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ $162 ($34) $173 Customer Profit $354.50 $992.60 $70.90 ,[object Object],$78 $546 $156 ,[object Object],$433 $1,539 $227 Cost of Sales $595 $1,505 $400 Total Revenue $320 ($35) $15 Customer Profit

… However, Activity Based Costing provides the most accurate customer profitability analysis ,[object Object],ACTIVITY USAGE ACTIVITY FINANCIALS Final customer profitability is drastically different from initial analysis THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ 20 0 0 # of packages through customs Custom 175 700 125 Weight (in pounds) Delivery/freight 50 100 140 700 10 200 Gadgets packed Gizmos packed Packaging 50 100 140 700 10 200 Gadgets manufactured Gizmos manufactured Manufacturing 75 75 50 Number of calls Order taking Randy Ron Rick Unit Cost Driver $50 $0 $0 $2.50 # of packages through customs Custom $52.50 $210 $37.50 $0.30 Weight (in pounds) Delivery/freight $31.25 $27.50 $87.50 $192.50 $6.25 $55 $0.63 $0.28 Gadgets packed Gizmos packed Packaging $182.50 $10 $511 $70 $36.50 $20 $3.65 $0.10 Gadgets manufactured Gizmos manufactured Manufacturing $232.50 $232.50 $155 $3.10 Number of calls Order taking $8.75 $201.50 $89.75 Profit $595 $1,505 $400 Revenue $586.25 $1,303.50 $310.25 Total Cost

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Activity Based Costing

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