BMP5006 - Activity Based Costing Business Case Presentation

This presentation delivers a business case for implementing Activity Based Costing (ABC) within an organization, referencing a chosen business to illustrate its application. It begins by defining Activity Based Costing and contrasting it with job costing, process costing, and marginal costing systems. The presentation further explains how Tesco organization effectively utilizes ABC in areas like target costing and product pricing. It identifies key components such as resources, resource drivers, activity drivers, activity cost drivers, and cost objects, explaining their roles in ABC. Advantages like accurate product costing and potential for cost reduction are weighed against disadvantages like complexity and expense. The presentation includes a cost analysis with overhead allocation and concludes by summarizing the benefits of ABC in allocating overhead costs to various activities and services. The document also includes a list of references.

Financial Management &
Decision Making

Table of content
 Definition of Activity Based Costing
 Comparison with other costing systems
 Activity Based Costing of xyz organisation
 Resources
 Resources drivers
 Activity Drivers
 Activity Cost Drivers
 Cost Objects
 Advantages and Disadvantages of the business using ABC

Introduction
This is costing method that assign overhead and indirect cost that is
related to the product and services and this accounting method of costing
recognize the relationship between the cost, overhead activities and
manufactured products. This basically used in manufacturing industry to
enhance the reliability of cost data and better classifying the cost of
organizations.

Definition of Activity based costing
This is most accurate method of product and services to assign the
manufacturing overhead cost to products in more logical manner than the
traditional approach of simply allocating cost to the activities.

Comparison of ABC with other costing system
Job costing costing- This refers to material, labour and overhead
cost are complied for the individual and it is accumulation process
highly detailed and labour-intensive. The company has started and
in first the $10000 of direct material cost, $4500 of direct labour
cost and $2000 overhead expenses. At the month end the system has
complied of total $16500 and this refers as Job costing method.

Continued..
Activity based costing – This identifies all specific overhead
related to the manufacture of each product and every kind of goods
and services. For example if total utility id $20000 and number of
direct labour hours worked. So, the total utility cost driver id
($20000 / 1000 hours) and overhead application rate id $20.

Continued..
 Process costing system- Material, labour are complied
for entire production process that allocated to individual
production unit. For example production run of 100000 cell
phones.

Continued..
Marginal costing- This represent the incremental cost of goods and
services by taking the total change in the number of goods that
divided by the change in the number of goods produces. For
example total cost of producing 100 units of goods is $200. The
total cost of producing 101 units is $204. The average cost of
producing units is $2,. So, marginal cost of producing unit is 101 is
$4 ($204-$200) / (101-100).

Activity based costing of Tesco organization
In the Tesco, the Activity-based costing is used
effectively in order to achieve the results in proper
manner and used in target costing, product costing,
product line and servile pricing. The formula for
activity based costing is the cost pool total divided by
the cost driver, that will yield cost driver rate.

Continued..
The calculation of Activity based costing are identify the activities
required to create the product and assigning the cost pool activity such as
hours or units. In the organisation the it enhances in various ways such as
expand the number of cost pools that used to assemble overhead cost and
it create new bases for assigning overhead cost to items such as cost are
allocated based on the activity that generate volume measure and making
the cost that is considered is necessary.

Resources
 Resources refers to the people, facilitates and cost
associated with the people and expenses that are
concerned with economic elements while
performing the activities. These are core element
that operate the organisation.

Resource drivers
 This include the labour hour, machine hour and
consumer contacts. Theses measure the quantity of
resources consumed by the activity and used to
assign the cost of resources to the activity.