Activity Based Costing (ABC): Implementation, Advantages, and GM Case

This presentation provides a comprehensive overview of Activity Based Costing (ABC), contrasting it with traditional costing methods. It defines ABC as a costing approach that monitors activities to trace resource consumption and cost final outputs, highlighting its differences from traditional methods, such as the inclusion of both manufacturing and non-manufacturing costs. The presentation details the advantages of ABC, including accurate product costing and systematic overhead allocation, while also acknowledging disadvantages like high initial investment and maintenance costs. It further explores the motivations for ABC adoption, citing General Motors (GM) as a key example, and discusses the implementation of ABC within GM to improve operational cost estimation. The presentation concludes by proposing areas of improvement for GM through enhanced use of ABC in management accounting for better cost control and waste reduction, referencing studies that support the effectiveness of ABC in improving understanding of actual costs. The presentation refers to academic sources and books for its content.

Transcript
PPT 1: Introduction
During the mid 1980, it was felt that absorption costing has certain limitations and it does
help in allocating the cost to the products. So, companies are looking for new costing approach
that can help in reflecting the true product and help them to estimate their profits from each
product line correctly. The absorption costing is introduced when companies manufactured only
few products and it is easy to allocate the indirect costs to the products. Also the overhead are
very little that does not impact the decision of company. The limitation of absorption has to the
introduction of the Activity based costing (ABC) model. This ABC model has been widely
accepted by mostly companies and it has very few limitations.
PPT 2: ABC Costing (Definition and Concept)
Activity based costing refers to the approach of the costing and it involves the monitoring
of the activities which helps in tracing the resources consumed and costing the final outputs.
Through using this costing method resources are assigned to those activities and activities to the
cost objects based on consumption estimates. In this way the activities cost uses cost drivers to
assign the activity cost to the outputs. This definition is given by the CIMA Official
Terminology, 2005. In simple language, activity based costing is the popular costing
methodology that finds all the activities that are associated with the organization and uses cost
pool statement to assign the indirect cost of each activity with the cost of each product and
services based on the actual consumption.
PPT 3: How ABC differs from the traditional Costing system
There are mainly three main differences between the ABC costing and traditional costing
system:
 In traditional costing system only manufacturing costs are allocated to the products and
services while in ABC costing both manufacturing as well as non manufacturing cost are
allocated to the products and services.
 ABC costing model excludes some of manufacturing cost while allocating the cost to the
products and services. On the other hand traditional costing approach allocates all the

manufacturing costs to the products and services. Manufacturing cost that are excluded
by the ABC are Organization-sustaining costs and costs of unused or idle capacity.
 The third difference is that activity based costing uses more than one cost pools to
allocate the costs to the products and services while traditional costing approach uses
only one cost pool to allocate all the indirect cost to the product and services.
PPT 4: Advantages and disadvantages of Activity based costing
Advantages
 Activity based costing helps in providing the accurate costing of products and services
 Overhead costs are divided to the various products and services in the systematic manner
 The activity based costing also integrated with six sigma technology to further improve
the costing system
 It helps in benchmarking of other products
Disadvantages
 Big investment is required at the initial stage of implementation of ABC costing model
 The maintenance cost of the ABC costing model is very high and it requires frequent
change to the system
PPT 5: Motivations for ABC Introduction
Activity Based Costing (ABC) is largely being used by the manufacturing organizations
over the traditional cost accounting systems. This is because the benefits derived from these
organizations due to its effective control obtained by the use of system for accounting,
controlling and reducing the overhead costs. One of the most recognized examples of a company
from the manufacturing industry adopting the use of ABC costing is General Motors (GM), one
of the largest automaker in the world. The company has adopted the use of ABC model for
carrying out an evaluation of the estimated use of energy in its manufacturing plant as per the
difference schedule of production.
PPT 6: Implementation of ABC

The implementation of ABC by GM has enabled the company to trace resources as per
the cost of the different objects leading to a more effective estimation of operational cost. The
accurate prediction of the costs involved in different activities such as equipment, labor and
materials have resulted in achieving more accurate results by the company. The method has also
proved to be highly beneficial in estimating the cost of any additional activity such as
environmental factors. The accurate estimation of the overhead costs as per the monetary values
have helped the company at large to reduce its operational cost and improving its profitability
position.
PPT 7: Area of Improvement
ABC cost accounting system is particularly used by GM only for identification and
allocation of overhead costs on the basis of idea that cost objects consumes activities which in
turn consume resources and it results in costs. However, it could be used by the company in
decision-making in its major management accounting areas. The accurate identification of the
overhead costs as per the activities would help the management accountants to take correct
decisions regarding the control of the costs. This would help the company in improving the
operational efficiency. The company consists of different areas for process improvement in order
to reduce the waste generation and eliminating the non-value adding activities from the
manufacturing process.
PPT 8: Requirement of Improvement
The manufacturing companies such as GM consist of large number of processes that
involves high amount of waste generation. Therefore, it is necessary for GM to identify the non-
value adding activities to reduce the waste generation in its overall manufacturing process. The
identification of the resources consumed by the cost objects would help in identification of the
major area that incurs high cost. Also, the activities that do not add any value can be eliminated
from the manufacturing process effectively by the company.
PPT 9: Proposal & Evidence
The area of improvement identified in the company through the use of ABC is proposed
to be implemented in the management accounting area. The successful implementation of the

method to identify the operational cost of the overall manufacturing process requires adequate
support from management in designing and implementation of an effective plan to adopt ABC.
There have been several cases illustrating the effectiveness of ABC costing system to facilitate
management accountants in taking decision in relation to the reduction of operational costs. It
has proved to be largely effective in gaining an in-depth understanding of the actual cost of good
and services produced by manufacturing organizations. Therefore, its use in management
accounting area of the company is recommended for accurate identification of the activities
consuming large resources so that effective steps can e taken for its reduction.
PPT 10: References
Cokins, G. 2001. Activity-based Cost Management: An Executive's Guide. John Wiley & Sons,
2001. .
Emblemsvåg, J. and B. Bras. 2005. Activity-Based Cost and Environmental Management - A
Different Approach to the ISO 14000 Compliance. Kluwer Academic Publishers.
Popesko, B. 2010. ABC Application Methodology for Manufacturing Industries. E+M Ekonomie
a Management, 1 (7), pp. 103-115, 2010.
Weil, R.L. and Maher, M.W. 2005. Handbook of Cost Management. New Jersey: John Wiley &
Sons.