Productivity and Quality

Topics: Costs, Cost, Cost accounting Pages: 25 (4398 words) Published: June 5, 2013
Activity Based Costing for Activity Based Management
Meiklejohn Paul, Director Management Consulting 17 February 2012

Agenda
1. What is Activity Based Costing (ABC)? 1.1 What is ABC and Why should it be used? 1.2 Traditional costing vs ABC 1.3 Activity based costing processes 2. How ABC should be used to manage (Activity based management)? 2.1 When to use ABC? 2.2 How to use ABC for ABM? 2.3 Scoring High - Low value adding activities 2.4 Activity Based Management applications 3. ABC/ABM implementation 3.1 Where ABC has been used 3.2 Steps to develop ABC Cost Flow Model 3.3 ABC Implementation Project 3.3 Challenges and success factors Appendix: KPMG ABC and Cost Optimisation tools

© 2012 KPMG Limited, a Vietnamese limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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1. What is Activity Based Costing? 1.1 What is ABC and Why should it be used? What is ABC? (the Definition)
ABC (Activity Based Costing) is a technique for measuring the cost and performance of activities, products and services on the basis of the resources consumed by the various activities which produce that product or service. Products and services in themselves do not cause costs to incurred. Rather work itself consumes resources which in turn incur costs.

Why it should be used? (the Benefits)
• Bringing cost and operational information to the level needed for management decisions • Gaining tighter control over overhead and indirect costs • Pricing products/services more accurately • Establishing foundation for activity-based management and performance measurement • Promoting a continuous improvement framework and mindset

To put ABC into context as a performance management tool
© 2012 KPMG Limited, a Vietnamese limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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1. What is Activity Based Costing? 1.2 Traditional Costing vs ABC - The concept Traditional Costing Activity Based Costing

Inputs (Resources/Costs)

Inputs (Resources/Costs)

Resource Drivers Volume Related Basis

Activities

Activity Drivers

Product/Service
 Assumes that costs vary with units produced

Product/Service
 Activities consume resources/costs  Products/Services consume different levels of activities 3

© 2012 KPMG Limited, a Vietnamese limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

1. What is Activity Based Costing? 1.2 Traditional Costing vs ABC – Feature comparison Activity Based Costing


Traditional Costing
• •

ABC focuses on activities in the production or service delivery process.

Focus on the cost of the product only. Costs are traced to the product on assumption that resources are consumed in proportion to the volume produced. Simpler In the past: • Small number of products/services which did

• Costs are traced to activities to products/services, based Key on the demand for these activities during the features production/delivery process. • •



More complex More accurate product and service costs enable better strategic decisions regarding: • Product/service pricing • Product/service mix. • Make vs buy decision •

not differ much in terms of required manufacturing support.
• Labor was dominant component in the cost

structure

Pros


• Investments in R&D, process automation • Cost control

Increased visibility of the activities performed enables a company to: • Focus more on the management of activities, such as

improving the efficiency of high cost activities.
• Identify and reduce non-value added activities •

ABC can be expensive to use...
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