BMP5006 Financial Management: Activity Based Costing Presentation 2022

This presentation provides a comprehensive overview of Activity Based Costing (ABC) within the context of financial management and decision-making, specifically for the BMP5006 course. It begins by defining ABC and comparing it with traditional costing systems, highlighting the advantages and disadvantages of each. The presentation then delves into the practical application of ABC within an organization, detailing resources, resource drivers, activities, activity drivers, activity cost drivers, and cost objects. It emphasizes the benefits of using ABC, such as more accurate product costing and better understanding of cost behavior, while also acknowledging its complexities and potential drawbacks, like the cost and difficulty of implementation, and the challenges in selecting appropriate cost drivers. The presentation concludes by advocating for the adoption of ABC over traditional costing methods due to its superior accuracy and in-depth cost analysis, supported by references to relevant academic literature.

BMP5006 Financial Management & Decision
Making
Assessment 1 - Presentation

Activity Based Costing Of xyz
Organisation
Name: xxxxxxx
ID: xxxxxxx

Content
• Definition of Activity Based Costing
• Comparison with other costing systems
• Activity Based Costing of xyz organisation
Resources
Resource Drivers
Activities
Activity Drivers
Activity Cost Drivers
Cost Objects

Content
• Advantages of the business using ABC
• Disadvantages of the business using ABC
• Traditional Costing Techniques
• Why Activity Based Costing (ABC) might be recognised as beneficial in
preference to Traditional Costing Techniques

Definition of Activity Based Costing (ABC)
It refers to the technique of allocation of overheads or expenses and indirect
costs related to the product and services such as employees salaries and
utilities. ABC costing generally used in manufacturing unit and it help
company to produce products near to its true costs and provide better
allocation of manufacturing costs. It is based on the activities or actions that
are includes any work or task of unit for a specific objective. Activity based
costing is used in target costing, product costing, product profitability
analysis and customer profitability analysis.
• There are following steps to calculate Activity based costing
• Characterise all necessary activities required to make a product.
• Divide them into cost pools that refers to seperate cost related to
product activities such as manufacturing or operating activities.

Comparison with other costing systems
• Activity based costing is one of most valuable costing method. It
ascertain the costs for different methods and such methods are not
specific. It include expensive products and its not easy to apply.
Traditional costing method only allocated factory overheads and it is a
cimple method as compare to ABC. It provide accurate profits of the
products while in other costing workers have to efficient to do their
work. ABC costing helpful in determining the overhead costs for
normal purpose while other costing methods are not working in such
purpose.

Activity Based Costing of Marks & Spencer organisation - Resources
• ABC costing is an accounting method which entitle Marks and Spencer
to allocate overheads operation cost of the company to the particular
products and services. Marks and Spencer deals in two type of
products in retail business industry(division and discount).

Activity Based Costing of Marks & Spencer organisation – Resource Drivers
ABC costing improve the costing process of Marks and Spenser in three ways, first it
increase the cost pools which help in assembling costs. Secondly it make a new bases
for allocation of the costs such as overhead costs are assign on the basis of activities
which generate costs rather than on quantity measures such as machine hours and
direct labour cost. Lastly it modify the nature of various indirect costs, creating costs
antecedently considered indirect such as depreciation, salaries etc. Resource driver of
activity based costing are as follows:
• Machine hours
• labour hours

Activity Based Costing of Marks &
Spencer organisation – Activities
• Unit level: These are the actions that make up a unit. The utilisation of indirect
activities that consume materials/consumables increases in proportion to the
amount of resources consumed. The number of units produced can be used to
identify it. number of units Every item must be inspected or tested. thing
manufactured, if it was judged required, or, more commonly, every 100th item
created.
• Batch level: Every time a batch of items is produced, processes such as setting up
a machine or executing a purchase order are completed. The cost of batch-
related operations fluctuates depending on the number of batches produced,
but it is consistent (or fixed) across all units in the batch.

Activity Based Costing of Marks &
Spencer organisation – Activity Drivers
• The ABC implementation requires a number of separate practical stages,
which are listed below:
• Staff Training
• Process Specification
• Activity Definition
• Activity Driver Selection
• Assigning Cost

Activity Based Costing of Marks &
Spencer organisation – Activity Cost Drivers
• An amusement esteem driver is a bookkeeping term. A worth driver influences
the worth of explicit business exercises. In movement based costing (ABC), an
undertaking cost driver impacts the charges of work, upkeep, or different
variable expenses. Cost drivers are principal in ABC, a part of administrative
bookkeeping that distributes the circuitous expenses, or overheads, of a
movement. An expense driver on the double impacts a business action. There
could likewise be different worth drivers related with an action. For instance,
direct work hours are a driver of most exercises in item fabricating.

Activity Based Costing of Marks &
Spencerorganisation – Cost Objects
A cost object is an item for which a cost is compiled. For example, this
can be a product, product line, service, project, customer, distribution
channel, or activity. Cost objects are used in activity-based costing
analyses as the focal point of cost accumulations. A shut evaluation of
fee objects is also useful for managing charges at some stage in an
organization.

Advantages of the business using ABC
• Exact goods price: It is the cost which help in determining the exact cost or price of
any goods or services by concentrating on reason and consequences relationship in
the cost commitment.
• Detail about the nature of cost: This method of costing is generally shows the
behaviour or nature of cost. It is also useful at the time of declining the cost price and
determining practice which do not sum up the product worth.
• Mapping business activity for the cost object: Activity based costing or ABC uses more
numbers of cost drivers where few are based on the transaction and few are based on
the degree of goods.

Disadvantages of the business using ABC
• Costly and Complex: ABC has severa value swimming pools and multiple
price drivers and consequently can-be more complex than common product
costing systems. It can prove steeply-priced to manipulate ABC system.
• Selection of Drivers: A few hardships arise in the execution of ABC
framework, for example, goal of cost drivers, adventure of continuous
expenses, different worth driver costs and so on.
• Disadvantages to Smaller Firms: ABC has various levels of utility for stand-
out big business, for example, monster producing affiliation can utilize it
more conveniently than the more modest firms.

Traditional Costing Techniques
• It is the method of costing which useful in allocating the plant
overhead to goods. It is done on the basis of total mass of
manufacture resources exhausted where the overhead is
implemented on the basis of total working hours of labours consumed
and how much hours machine is working during a day. The traditional
costing is also make difficulty when expenses of factory are more than
the basis of allocation. This problem is arises when the industry uses
large number of machinery in manufacturing goods than labours.

Why Activity Based Costing (ABC) might be recognised as beneficial in preference to Traditional Costing Techniques
• Every organization recorded its day to day transaction according to income and
expenditure for analysing and improving the business operation during the
given period of time with the help of accounting systems. Generally business
uses two types of costing methods: Activity based costing and traditional
costing but ABC is considers the most favourable techniques in comparison to
traditional. It is because the ABC provides give more in-depth knowledge of
each and every cost or accurate cost than traditional costing. It is also arises a
reason because Traditional costing uses only single rate for issuing of overheads
for the whole enterprises, while Absorption based costing make various rate
pools.

Summary
• Activity-based costing is a system of accounting that allocates expenses
to activities rather than products or services. This allows for more
precise allocation of resources and overhead expenses to the products
and services that consume them.
• ABC is extremely beneficial to a company that sells a variety of products.
• The value-added activities are those that must be completed in order
for the process to be completed.
• Activity-based budgeting is a method of planning and controlling the
organization's planned activities in order to create a cost-effective
budget that satisfies forecast workload and agreed-upon strategic
objectives.

References
• Akhmadeev, R.G and et.al., 2018. Evaluation of Financial and Analytical
Activities of the Biggest Car Makers of the Russian Federation. Jurnal
Pengurusan. (54).
• Atia, N.G., Bassily, M.A. and Elamer, A.A., 2020. Do life-cycle costing and
assessment integration support decision-making towards sustainable
development?. Journal of Cleaner Production. 267. p.122056.
• Baumers, M. and Tuck, C., 2019. Developing an understanding of the cost of
additive manufacturing. In Additive Manufacturing–Developments in
Training and Education (pp. 67-83). Springer, Cham.
• Bießlich, P and et.al., 2018. A hierarchical metamodeling approach for airline
costs. Journal of air transport management. 71. pp.193-200.

Thank you