ABC Full Project

8/10/2019 ABC Full Project

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Activity Based Costing as a measure of improving the cost structureat SAIPACKING LTD, MYSORE

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INDEX

Sr.No. CONTENTS Page No.

1 Executive summary

2 Industry Profile

3 Organization profile

4 Research Methodology

5 Data Collection

6 Conceptual Framework

7 Analysis

8 Findings

9 Suggestions

10 Conclusion

11 Bibliography


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EXECUTIVE SUMMARY


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SAI PACKING LTD,MYSOREshould go for Activity Based costing as

it understands true profitability of the customers, products, or services and also helps

in identifying areas where the cost can be reduced or efficiencies can be increased.


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INDUSTRY PROFILE


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INDUSTRY PROFILE

Manufacturing Industry

Manufacturing industry refers to those industries which involve in the

manufacturing and processing of items and indulge in either creation of new

commodities or in value addition. The manufacturing industry accounts for a

significant share of the industrial sector in developed countries. The final products

can either serve as a finished good for sale to customers or as intermediate goods

used in the production process.

Manufacturing industries are the chief wealth producing sectors of an economy.

These industries use various technologies and methods widely known as

manufacturing process management. Manufacturing industries are broadly

categorized into engineering industries, construction industries, electronics industries,

chemical industries, energy industries, textile industries, food and beverage

industries, metalworking industries, plastic industries, etc.

Manufacturing industries are important for an economy as they employ a huge share

of the labor force and produce materials required by sectors of strategic importance

such as national infrastructure and defense. However, not all manufacturing industries

are beneficial to the nation as some of them generate negative externalities with huge

social costs. The cost of letting such industries flourish may even exceed the benefits

generated by them.

Indias manufacturing base, which is the fourth-largest among emerging economies,

is among the fastest growing and has seen more investments as a proportion of gross

domestic product than any country except China. Employment opportunities in the

manufacturing industry have declined comparatively. Manufacturing industry

analysis also suggests that in some countries like China, technological know how has


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to be developed. Despite the fact that China is ranked fourth in the manufacturing

productivity, due to technological lacunae, it is not being able to compete in the world

market. Also needed are professionals well versed in the technological know how.

The Government has taken several initiatives to accelerate growth in this sector and

improve competitiveness of Indian industry in general and manufacturing in

particular.

Technology up gradation schemes for various sectors such as small scale

industries, textiles, food processing etc.;

Industrial infrastructure up gradation programmes on cluster basis;

Easier access to inputs at competitive prices and rationalization and reduction in

duty rates.

Encouragement to foreign technology collaborations and liberalization of FDI in

manufacturing activities.


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ORGANIZATION PROFILE


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ORGANIZATIONAL PROFILE

Company profile

Sri Sai Packaging was established in 2002 in mysore, Karnataka and is now rated

among the leading Corrugated Box Manufacturers, karnataka. Under the leadership of

our Owner, Mr. Shiv sai, we are becoming the talk of the market as reliable

Corrugated Boxes Manufacturers and Suppliers. These Wholesale Corrugated Boxes

are used in various industries for packaging and wrappingandwoodencartonboxes.

Infrastructure

We have a well-established infrastructure which is equipped with the latest high tech

machinery. The machinery helps in the on-time production of all our products. We

also have a spacious warehouse which is well arranged to store bulk products.

Team

We have a team of highly qualified and dedicated professionals. These professionals

are well versed with the latest technology. They work in coordination to produce the

desired products. The logistics team takes care of on-time delivery of these products.

QualityAssurance

We test for all our raw materials before production. The products go through rigorous

test at every stage from manufacturing to packaging and delivery. All our products

are thoroughly checked by our quality controllers to let the flawless products reach

the clients.


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Name of Owner : Mr. Shiv sai

Year of Establishment : 2002

Nature of Business : Manufacturer & Supplier

Packaging Products manufactured by us are known for their strength and durability.

Our range of Packaging Products includes Corrugated Boxes. These Packaging

Products are widely used in various industries like Automotive, Pharmaceutical,

Cosmetic, Ceramic and many more for transportations and storage purposes. Our

Packaging Products are well cushioned to give them shock resistance characteristics

keeping the product inside them safe. We also offer customization of Corrugated

Boxes. Our Packaging Products last long when compared to others. These Packaging

Products are available in various sizes.

Qualitative And Eco-Friendly Wooden Products

Sai packaingdoes not need any introduction in the field of Manufacturing and

Supplying of Wooden Boxes and Crates. The company has an active presence with

substantial client base which is spread not only in karnataka but in the other markets

as well. The assortment of Wooden Products offered by us includes Wooden Pallets,

Euro Pallets, Wooden Packaging Boxes, Heavy Wooden Packaging Boxes, Wooden

Crates, Wooden Packing Cases and various others.

A quality and performance driven company, we have been striving hard to offer

immaculate quality. By adhering to the principle of consistency in the business

protocol, the products range that we offer is superior in quality and at par with

international standards. We have a well established business network that helps in the

smooth and effective functioning of the business. The positive feedbacks from clients

have also played a vital role in adding latest features to the wooden boxes and pallets.


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Last but not the least; we are also looking forward to establish and maintain long

lasting relationship with our esteemed clients.

Organizational Strategy

A definite organizational strategy has to be in place before beginning the

process of identifying actual costs within the manufacturing process, as well as

implementing a plan once those costs are identified.

Although a small company or a company with only a product or two may be

able to dive right into ABC analysis and implementation, a larger organization must

do some careful planning before beginning. Sometimes, a pilot project using only

product or department is an ideal place to start. This allows the ABC pilot project

team to get some experience as well as hopefully providing some semi-rapid results

that can be utilized in the short-term, thereby proving the effectiveness of the method.

(Tarr) According to the OSD Comptroller iCenter website, which provides financial

services information for the Department of Defense, there are four steps to ABC

implementation:

1. I denti fy activitiesperform an in-depth analysis of the operating processes of

each responsibility segment. Each process may consist of one or more

activities required by outputs.

2. Assign resour ce costs to activi tiesthis is sometimes called "tracing."

Traceability refers to tracing costs to cost objects to determine why costs were

incurred. DoD categorizes costs in three ways:

a. Directcosts that can be traced directly to one output. Example: the

material costs (varnish, wood, paint) to build a chair.

b. Indirectcosts that cannot be allocated to an individual output; in

other words, they benefit two or more outputs, but not all outputs.


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Examples: maintenance costs for the saws that cut the wood, storage

costs, other construction materials, and quality assurance.)

c. General & Administrativecosts that cannot reasonably be associated

with any particular product or service produced (overhead). These

costs would remain the same no matter what output the activity

produced. Examples: salaries of personnel in purchasing department,

depreciation on equipment, and plant security.

3. I dentif y outputsidentify all of the outputs for which an activity segment

performs activities and consumes resources. Outputs can be products,

services, or customers (persons or entities to whom a federal agency is

required to provide goods or services).

4. Assign activi ty costs to outputsassign activity costs to outputs using activity

drivers. Activity drivers assign activity costs to outputs based on individual

outputs consumption or demand for activities. For example, a driver may be

the number of times an activity is performed (transaction driver) or the length

of time an activity is performed (duration driver).(OSD Comptroller iCenter)


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TYPES OF THE WOODEN CARTON BOXES

LIST OF CUSTOMERS

Cummins Generator Technologies, India

Motorsense, U.K

Cummins Generator Technologies, Mexico

Fasco Motors, USA

ABB Ltd, Bangalore

OITS Elevator company, India

Trident Power craft Pvt.Ltd, Hubli


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Kirloskar Electric co. Hubli

Mallik Engineering , Bangalore

Telco Construction Equipment, Dharwad


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ACTIVITY BASED COSTING FOLLOWED IN SAI PACKING LTD


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RESEARCH METHODOLOGY


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RESEARCH METHODOLOGY

The Study:

The present study is an attempt to understand and ascertain the costing method

followed in Sai packing ltd,mysore and to compare it with the costing method

Activity Based Costing.

Objectives of the study:

To study the functions and operations of the organization

To know and understand the existing costing method followed by SAI

PACKING LTD,MYSORE.

To identify activities involved in manufacturing of wooden carton 4x6.

To identify cost of the activities involved in manufacturing the product

wooden carton 4x6.

To allocate the cost for the activities.

To find the cost per unit of the product wooden carton 4x6.

To compare existing costing method followed by SAI PACKING

LTD,MYSOREwith Activity Based Costing.

Scope of the study:

The scope of this study is to know and understanding the various processes and

activities involved in manufacturing Industries especially in SAI PACKING

LTD,MYSORE. It involves finding out the cost per unit of the product wooden

carton 4x6 by following Activity based Costing.


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Need for the study:

The theoretical aspects of ACTIVITY BASED COSTING provide the framework of

the study. A conceptual and the practical approach is the need of the hour. Hence the

field study becomes as essential part of the curriculum. Thus this project study

conducted to integrate theoretical and practical aspects of Activity based costing in

the organization.

DATA COLLECTION

Primary Data

Following are the sources of primary data collected.

Much of the information was collected from the cost accountant of SAI

PACKING LTD,MYSORE.

Frequent discussions were made with other employees of the company.

Met few senior level executive of the firm.

Secondary Data

Secondary data was collected through last years balance sheet of SAI

PACKING LTD,MYSORE.

Books on cost accounting were referred.

Company website


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Limitations of the study:

The study is limited to SAI PACKING LTD,MYSOREonly.

In order to maintain confidentiality some information could not be

disclosed by sai packaing ltd.


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CONCEPTUAL FRAMEWORK


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About cost structure

Theexpenses that a

firm musttake intoaccount whenmanufacturing aproduct orproviding aservice.

Types of coststructuresincludetransaction costs,sunk costs,marginal

costs andfixed costs.The cost structure of the firm is theratio of

fixedcosts tovariable costs.

Historical development of activity based costing

Traditionally, costaccountantshad arbitrarily added a broad percentage of analysis

into the indirect cost. In addition, activities include actions that are performed both by

people and machine. However, as the percentages of indirect oroverhead costsrose,

this technique became increasingly inaccurate, because indirect costs were not caused

equally by all products. For example, one product might take more time in one

expensive machine than another productbut since the amount of direct labor and

materials might be the same, additional cost for use of the machine is not being

recognized when the same broad 'on-cost' percentage is added to all products.

Consequently, when multiple products share common costs, there is a danger of one

product subsidizing another.

ABC is based on George Staubus' Activity Costing and Input-Output

Accounting. The concepts of ABC were developed in themanufacturing sectorof the

United States during the 1970s and 1980s. During this time, the Consortium forAdvanced Management-International, now known simply as CAM-I, provided a

formative role for studying and formalizing the principles that have become more

formally known as Activity-Based Costing.

Robin Cooper andRobert S. Kaplan,proponents of theBalanced Scorecard,brought

notice to these concepts in a number of articles published inHarvard Business

Review beginning in 1988. Cooper and Kaplan described ABC as an approach to

solve the problems of traditionalcost management systems.These traditional costing
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systems are often unable to determine accurately the actual costs ofproductionand of

the costs of related services. Consequently managers were making decisions based on

inaccurate data especially where there are multiple products.

Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify

cause and effect relationships to objectively assign costs. Once costs of the activities

have been identified, the cost of each activity is attributed to each product to the

extent that the product uses the activity. In this way ABC often identifies areas of

high overhead costs per unit and so directs attention to finding ways to reduce the

costs or to charge more for costly products.

Activity-based costing was first clearly defined in 1987 byRobert S. KaplanandW.Brunsas a chapter in their bookAccounting and Management: A Field Study

Perspective. They initially focused on manufacturing industry where increasing

technology and productivity improvements have reduced the relative proportion of

the direct costs of labor and materials, but have increased relative proportion of

indirect costs. For example, increased automation has reduced labor, which is a direct

cost, but has increased depreciation, which is an indirect cost.

Like manufacturing industries,financial institutionshave diverse products and

customers, which can cause cross-product, cross-customer subsidies. Since personnel

expenses represent the largest single component of non-interest expense in financial

institutions, these costs must also be attributed more accurately to products and

customers. Activity based costing, even though originally developed for

manufacturing, may even be a more useful tool for doing this.

Activity-based costing was later explained in 1999 byPeter F. Druckerin the

bookManagement Challenges of the 21st Century. He states that traditional cost

accounting focuses on what it costs to do something, for example, to cut a screw

thread; activity-based costing also records the cost of not doing, such as the cost of

waiting for a needed part. Activity-based costing records the costs that traditional cost

accounting does not do.

The overhead costs assigned to each activity comprise an activity cost pool.
http://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Factors_of_productionhttp://en.wikipedia.org/wiki/Robert_S._Kaplanhttp://en.wikipedia.org/wiki/Robert_S._Kaplanhttp://en.wikipedia.org/wiki/Robert_S._Kaplanhttp://en.wikipedia.org/w/index.php?title=W._Bruns&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=W._Bruns&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=W._Bruns&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=W._Bruns&action=edit&redlink=1http://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Peter_F._Druckerhttp://en.wikipedia.org/wiki/Peter_F._Druckerhttp://en.wikipedia.org/wiki/Peter_F._Druckerhttp://en.wikipedia.org/wiki/Peter_F._Druckerhttp://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/w/index.php?title=W._Bruns&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=W._Bruns&action=edit&redlink=1http://en.wikipedia.org/wiki/Robert_S._Kaplanhttp://en.wikipedia.org/wiki/Factors_of_production


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ABOUT ACTIVITY BASED COSTING

Cost accounting approach concerned with matchingcostswithactivities (calledcost

drivers) that cause those costs. It is a more sophisticated kind ofabsorption-

costing and replaceslaborbasedcosting system. ABCstates that

(1)products consume activities, (2) it is the activities (and not the products) that

consumeresources, (3) activities are the cost drivers, and (4) that activities are not

necessarily based on thevolume ofproduction. Instead of allocating costs tocost

centers (such asmanufacturing,marketing, finance), ABCallocates direct

andindirect costs to activities such asprocessing an order, attending to

acustomercomplaint,or setting up amachine.A subset ofactivity based management

(ABM), it enablesmanagement to better understand (a) how and where the firm

makes aprofit,(b) indicates wheremoney is being spent and (c) which areas have the

greatest potential forcost reduction.Developedby professors Robert Kaplan and

Robin Cooper of Harvard University in late 1980's.

Activity Based Costing (ABC) is an accounting technique that allows an organization

to determine the actual cost associated with each product and service produced by the

organization without regard to the organizational structure. It is developed to provide

more-accurate ways of assigning the costs of indirect and support resources to

activities, business processes, products, services, and customers. ABC systems

recognize that many organizational resources are required not for physical production

of units of product but to provide a broad array of support activities that enable a

variety of products and services to be produced for a diverse group of customers. Thegoal of ABC is not to allocate common costs to products. The goal is to measure and

then price out all the resources used for activities that support the production and

delivery of products and services to customers.

Concept of Activity-Based-Costing:

An organization performs activities to do its business. These activities define the kind

of business you are in: a ship owner has an activity to unpack boats; an accounting
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firm prepares tax returns; a manufacturer produces products; a council delivers

services; a university teaches students. All activities consume resources. It is the

consumption of these resources that adds to overhead costs.

The basis of Activity Based Costing is look at the activities required to produce the

cost of the product or service. The activities consume resources and the cost of these

can be calculated. The amount of activity required for each product and service is

determined, hence the real cost can be determined.

Activity Based Costing Definition

ABC can be defined by the following equation:

C/A = HD + M + E + S

where C/A = Estimated cost per activity

H = Number of labor hours required to perform the activity one time

D = Wages per labor hour

M = Material costs required to perform the activity one time

E = Equipment costs to perform the activity one time

S = Subcontracting costs to perform the activity one time

The total cost for performing the activity will be based on the number of times the

activity is performed during a specific time frame.


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What's in ABC?

The activity is the work that is done.

The resource is what the activity uses to do the work e.g. people, equipment,

and services. Resources cost money.

The cost of the activity depends on the quantity of resources used to

accomplish the activity.

The cost driver for an activity is the factor that influences the amount of the

resources that will be consumed by this activity.

Example: the activity is delivering goods. The costs of this activity include the

truck drivers' wages, fuel, depreciation of the truck, insurance, etc. The

quantities of the resources that will be consumed by this activity are influenced

by the number of deliveries made per year. Hence the cost driver could be the

number of deliveries. A cost driver is designed to allocate the delivery activity

cost pool to the cost objects.

The activity driver measures how much of the activity is used by the cost

object. Example: Product A is delivered once a month, whereas product B is

delivered once a week. Products A and B require a different number of

deliveries, hence the cost of the delivery activity should be assigned to each

product on the basis of the number of deliveries each uses.

The cost object is whatever it is you wish to cost. It could be a product,

service, process, job or customer.

While traditional costing arbitrarily allocates overhead costs, ABC traces overhead

costs by looking at the activities that each product and service calls upon. With ABC

the products consume the activities. It is the activities that cost money.


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Why use Activity-Based-Costing?

Activity-Based-Costing is necessary for the following reasons.

Understand true profitability of your customers, products, or services

Quantify the cost of non-value added activities such as errors and

reworks

Identify opportunities to reduce costs and/or increase efficiency

Obtain actionable information to negotiate price increases for

unprofitable clients

Stratify overhead costs so they can be managed more effectively.

The ABC framework

Activity based costing has been claimed as a method of arriving at more accurate

costs, often in order to set selling prices. In a market economy, the idea of selling

prices based on costs is dangerous, with serious consequences for a business


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competitive stance. With the variety of conventions and concepts used in cost

determination, there are no absolutes in determining product costs, hence the

objective of accurate costs is diluted. However, the technique of ABC is being seen

more as a cost-distortion alarm; more as an attention directing tool; more as a cost

management tool.

Activity Based Costing is a methodology for understanding the activities, processes,

services and products of a business; understanding what drives the cost of these

activities and processes; and thus reducing the non-value-adding activities/processes.

The Elements of ABC can be described in the following model:

The ABC CROSS:

COST ASSIGNMENT VIEW

RESOURCES RESOURCE

DRIVERS


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Resource Drivers are the link between resources and activities assigning cost form the

financial statements.

Activity Driver is the factor used to assign cost from an activity to a object of work,

for instance, if making a sales call is the activity then the frequency of sales calls to a

specific customer/client would be the activity driver.

Object of Work is the specific objective at the end of a process, for instance, a

product, a satisfied customer/client.

Cost Drivers are factors that cause changes in the performance of activities and create

increased consumption of resource. Fundamentally there are two types of Cost

Drivers. The Structural Cost Drivers are viz. Scale, Scope, Experience, Technology

and Complexity. The Exceptional Cost Drivers are viz. Work Force Involvement,

Total Quality Management, Capacity Utilization, Plant Layout, Electricity, Product

Configuration and Exploiting Value Chain Linkages.

Activities comprise of units or work or task. For example purchase of raw materials,

activities involved in manufacturing etc.

ABC categorizes the activities into:

Unit level activities:

COST

DRIVERS

ACTIVITIES PERFORMANCE

MEASURES

OBJECTS

OF WORK

ACTIVITY

DRIVERS


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Less: Unit-level products cost

(Material, Power Costs, Other identifiable costs)

= unit level contribution

Less: Batch related costs

(Sets-ups, material movements, purchase orders, inspection)

= batchlevel contribution

Less: Product line costs

(Process engineering, product specifications, order change notices)

= product line contribution

Less: Consumer and market related costs

= customer level contribution

Less: Facility sustaining cost

(Plant management , rent , rates, and taxes, etc.,)

= net profit

Note: Unit level and batch contribution analysis facilitate short-term decision relating

to products and complexity analysis. Product line contribution helps in product line

decisions. Customer level contribution helps in customer and market related

decisions. Facility sustaining cost are period cost are period which are fixed in nature.

STAGES OR STEPS INVOLVED IN ACTIVITY BASED COSTING.

Step 1: Identify the various activities within the organization. Activities comprise of

units of work or task. For example purchase of material is an activity consisting of


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series of task like purchase requisition, advertisement, inviting quotations,

identification of suppliers, issuing purchase orders, follow up etc.

Step 2: Relate the overheads to the activity using resource cost drivers

a) Over heads will be related to support and primary activities.

b) For this purpose, resource cost drivers will be used.

c) All costs will be identified under the activities, thus creating activity cost

pools.

Step 3: Apportion the cost to support activities over the primary activities on suitable

basis.

a) This is very much like reapportionment of service department expenses to

production departments.

b) Cost of support activities are spread over to primary activities to collect costs

only under them.

c) The base is the cost driver which is the measure of how the support activities

are used.

Step 4: Determine the activity cost drivers for activity/cost pools.

a) Activity cost drivers used to relate the overheads collected in the cost pools

to cost objects should be determined.

b) This is based on the factor that drives the consumption of the activity.

c) For example, in production scheduling, the driver will be the number of

batches ordered.

Step 5:Calculate Activity cost driver rate = Total cost of activity

Activity cost driver

a) Activity cost driver rates are computed for each activity.


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b) The rates will be multiplied by the different amounts of each activity that

each product/other cost object consumes so as to ascertain its cost.

c) This rate can be used to ascertain cost of the product (as in traditional

absorption costing) and to ascertain cost of other cost objects such as

customers/customer segments and distribution channels.

d)

Cost drivers are selected based on three criteria:

e) (1) Causal relation. Ideally, choose a cost driver that causes the cost. This is the

best cost

f) drive available.

g) (2) Benefits received. Choose a cost driver to assign costs in proportion to

benefitsh)

received.

i) (3) Reasonableness or fairness. When the first two criteria fail, assign costs on the

basis

j) of fairness or reasonableness.

k) For any indirect cost, a predetermined rate can be computed as follows:

l) Predetermined rate = Estimated indirect cost

m)

Estimated volume of allocation base

n) .

o) For activity-based costing, the first stage consists of activities. Each activity has

an

p)

associated cost pool and requires a cost driver rate using the formula above.

q) The second stage in a two-stage system using activity-based costing allocates

costs to

r)

products by multiplying the cost driver rates by the number of units of the cost

driver (i.e.,

s) volume of activities) consumed in each product..

t)

The distinctive feature of activity-based costing is that it recognizes that

overhead costs

u) are caused by activities and that activities may not be caused solely by volume,

but by

v) other types of activities. Cost drivers for the activities should reflect the cost

incurrence


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w) in the activity, even if cost is not caused by volume.

Aims of model

With ABC, a company can soundly estimate the cost elements of entire products

ACTIVITIES and services. That may help inform a company's decision to either:

Identify and eliminate those products and services that are unprofitable and lower

the prices of those that are overpriced (product and service portfolio aim)

Or identify and eliminate production or service processes that are ineffective and

allocate processing concepts that lead to the very same product at a better yield

(process re-engineering aim).

In a business organization, the ABC methodology assigns an organization's

resourcecoststhrough activities to theproductsandservicesprovided to its

customers. ABC is generally used as a tool for understanding product and customer

cost and profitability based on the production or performing processes. As such, ABC

has predominantly been used to support strategic decisions such as pricing,

outsourcing, identification and measurement of process improvement initiatives.

Prevalence

Following initial enthusiasm, ABC lost ground in the 1990s, to alternative metrics,

such as Kaplan'sbalanced scorecardandeconomic value added. An independent

2008 report concluded that manually driven ABC was an inefficient use of resources:

it was expensive and difficult to implement for small gains, and a poor value, and that
http://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Balanced_scorecardhttp://en.wikipedia.org/wiki/Balanced_scorecardhttp://en.wikipedia.org/wiki/Balanced_scorecardhttp://en.wikipedia.org/wiki/Economic_value_addedhttp://en.wikipedia.org/wiki/Economic_value_addedhttp://en.wikipedia.org/wiki/Economic_value_addedhttp://en.wikipedia.org/wiki/Economic_value_addedhttp://en.wikipedia.org/wiki/Balanced_scorecardhttp://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Product_(business)http://en.wikipedia.org/wiki/Cost


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alternative methods should be used.[2]

Other reports show the broad band covered

with the ABC methodology.[3]

Alternatives

Lean accountingmethods have been developed in recent years to provide relevant

and thorough accounting, control, and measurement systems without the complex and

costly methods of manually driven ABC. However lean accounting is a snapshot

concept for capturing just partial derivatives or differentials of selected cost

functions. Lean accounting takes an opposite direction from ABC by working to

eliminate peculiar cost allocations rather than apply complex methods of resource

allocation.

Lean accounting is primarily used withinlean manufacturing. The approach has

proven useful in many service industry areas including healthcare, construction,

financial services, governments, and other industries.

Application ofTheory of constraints(TOC) is analysed in a study showing interesting

aspects of productive coexistence of TOC and ABC application. Identifying costdrivers in ABC is described as somewhat equivalent to identifying bottlenecks in

TOC. However the more thorough insight into cost composition for the inspected

processes justifies the study result: ABC may deliver a better structured analysis in

respect to complex processes, and this is no surprise regarding the necessarily spent

effort for detailed ABC reporting.

Methodology

Methodology of ABC focuses oncost allocationin operational management. ABC

helps to segregate

Fixed cost

Variable cost

Overhead cost
http://en.wikipedia.org/wiki/Activity-based_costing#cite_note-2http://en.wikipedia.org/wiki/Activity-based_costing#cite_note-2http://en.wikipedia.org/wiki/Activity-based_costing#cite_note-2http://en.wikipedia.org/wiki/Activity-based_costing#cite_note-3http://en.wikipedia.org/wiki/Activity-based_costing#cite_note-3http://en.wikipedia.org/wiki/Activity-based_costing#cite_note-3http://en.wikipedia.org/wiki/Lean_accountinghttp://en.wikipedia.org/wiki/Lean_accountinghttp://en.wikipedia.org/wiki/Lean_manufacturinghttp://en.wikipedia.org/wiki/Lean_manufacturinghttp://en.wikipedia.org/wiki/Lean_manufacturinghttp://en.wikipedia.org/wiki/Theory_of_constraintshttp://en.wikipedia.org/wiki/Theory_of_constraintshttp://en.wikipedia.org/wiki/Theory_of_constraintshttp://en.wikipedia.org/wiki/Cost_allocationhttp://en.wikipedia.org/wiki/Cost_allocationhttp://en.wikipedia.org/wiki/Cost_allocationhttp://en.wikipedia.org/wiki/Fixed_costhttp://en.wikipedia.org/wiki/Fixed_costhttp://en.wikipedia.org/wiki/Variable_costhttp://en.wikipedia.org/wiki/Variable_costhttp://en.wikipedia.org/wiki/Overhead_costhttp://en.wikipedia.org/wiki/Overhead_costhttp://en.wikipedia.org/wiki/Overhead_costhttp://en.wikipedia.org/wiki/Variable_costhttp://en.wikipedia.org/wiki/Fixed_costhttp://en.wikipedia.org/wiki/Cost_allocationhttp://en.wikipedia.org/wiki/Theory_of_constraintshttp://en.wikipedia.org/wiki/Lean_manufacturinghttp://en.wikipedia.org/wiki/Lean_accountinghttp://en.wikipedia.org/wiki/Activity-based_costing#cite_note-3http://en.wikipedia.org/wiki/Activity-based_costing#cite_note-2


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The split of cost helps to identifycost drivers,if achieved. Direct labor and materials

are relatively easy to trace directly to products, but it is more difficult to directly

allocate indirect costs to products. Where products use common resources differently,

some sort of weighting is needed in the cost allocation process. Thecost driveris a

factor that creates or drives the cost of the activity. For example, the cost of the

activity of bank tellers can be ascribed to each product by measuring how long each

product's transactions (cost driver) takes at the counter and then by measuring the

number of each type of transaction. For the activity of running machinery, the driver

is likely to be machine operating hours. That is, machine operating hours drive

labour, maintenance, and power cost during the running machinery activity.

Application in routine business

ABC has proven its applicability beyond academic discussion. ABC is applicable

throughout company financing, costing and accounting:

ABC is a modeling process applicable for full scope as well as for partial views.

ABC helps to identify inefficient products, departments and activities.

ABC helps to allocate more resources on profitable products, departments and

activities.

ABC helps to control the costs at any per-product-level level and on a

departmental level.

ABC helps to find unnecessary costs that may be eliminated.

ABC helps fixing the price of a product or service with any desired analytical

resolution.

A reports summarizes reasons for implementing ABC as mere unspecific and mainly

for case study purposes (in alphabetical order):

Better Management

Budgeting, performance measurement

Calculating costs more accurately

Ensuring product /customer profitability
http://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driverhttp://en.wikipedia.org/wiki/Cost_driver


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Evaluating and justifying investments in new technologies

Improving product quality via better product and process design

Increasing competitiveness or coping with more competition

Management

Managing costs

Providing behavioral incentives by creating cost consciousness among employees

Responding to an increase in overheads

Responding to increased pressure from regulators

Supporting other management innovations such as TQM and JIT systems

Beyond such selective application of the concept, ABC may be extended to

accounting, hence proliferating a full scope of cost generation in departments or

along product manufacturing. Such extension, however requires a degree of

automatic data capture that prevents from cost increase in administering costs.

Activity Based CostingPros & Cons

Pros

Identifies Non-Value Added Activities

Identifies cost savings opportunities (untraceable costs)

Provides very detailed cost/profitability information

Differentiates complex versus simple processes

More data can lead to more information = better decisions

Cons

Very costly to implement and maintain

Historical in nature (same as traditional absorption costing)

Detail versus Accuracy (GIGO)

Discourages novel approachs to processes

Encourages activity

Assumes equal and proportionate benefits result from common activity

Steps to implement Activity-Based costing


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1. Identify and assess ABC needs - Determine viability of ABC method within an

organization.

2. Training requirements - Basic training for all employees and workshop

sessions for senior managers.

3. Define the project scope - Evaluate mission and objectives for the project.

4. Identify activities and drivers - Determine what drives what activity.

5. Create a cost and operational flow diagramHow resources and activities are

related to products and services.

6. Collect data Collecting data where the diagram shows operational

relationship.

7. Build a software model, validate and reconcile.

8. Interpret results and prepare management reports.

9. Integrate data collection and reporting.

Integrating EVA and PBC

Recently, Mocciaro Li Destri, Picone & Min (2012) proposed a performance and

cost measurement system that integrates the EVA criteria with Process Based Costing

(PBC). Authors note that activity-based costing system is introspective and focuses

on a level of analysis which is too low. On the other hand, they undescore the

importance to consider the cost of capital in order to bring strategy back into

performance measures.

Limitations


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Applicability of ABC is bound to cost of required data capture. That drives the

prevalence to slow processes in services and administrations, where staff time

consumed per task defines a dominant portion of cost. Hence the reported application

for production tasks do not appear as a favorized scenario.

ABC Implementation Issues:

Another refinement in product costing that often accompanies implementation of

ABC focuses on step of the five-step product costing sequence: identify the direct

costs associated with the cost object. The refinement involves the following. For a

given cost object, the company attempts to identify costs currently treated as

overhead that have not beenbut can betraced directly to the cost object. In other

words, costs are moved from the overhead cost pool to the direct cost category. For

example, an accounting firm might take certain office-support expenses formerly

treated as overhead, such as printing and copying, and start tracking and assigning

these costs to specific jobs (audits, tax engagements, etc.) for internal reporting and

profitability analysis (but not necessarily for client billing purposes).

The successful implementation of ABC usually requires participation by managers

from non-accounting functions, such as production and marketing. Because ABC

focuses on activities, and activities often cut across departments and functional areas,

implementing ABC can improve lines of communication and cooperation within the

company. On the other hand, more accurate cost allocation does not, by itself, reduce

costs. The initial move from a traditional costing system to ABC usually shifts

overhead costs from some products to other products, with some managers winning

and some losing. Some companies have found that hiring an outside consulting

firm to assist with the ABC adoption facilitates obtaining buy-in by managers and

employees throughout the company. Perhaps partly for this reason, ABC

implementation has become an important consulting product for accounting firms and

for many consulting firms.


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Although ABC should provide the company more accurate information, it is not a

panacea; some companies that invested time and money implementing ABC did not

realize the benefits they expected. Some of these companies have reverted to simpler,

more traditional costing systems.

ACTIVITY BASED COSTING ADVANTAGES

More accurate costing of products/services, customers, distribution channels.

Better understanding overheads.

Easier to understand for everyone.

Utilizes unit costrather than just total cost.

Integrates well with Six Sigma and other continuous improvement programs.

Makes visible waste and non-value added.

Enables costing of processes, supply chains, and value streams

Activity Based Costing mirrors way work is done

Facilitates benchmarking.

ACTIVITY BASED COSTING DISADVANTAGES

More time consuming to collect data.

Cost of buying, implementing and maintaining activity based system.

Makes waste visible which some executives and managers don't want their

boss to see.


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How does Activity Based Costing differ from traditional cost accounting systems?

Most traditional costing systems utilize a single basis, (e.g. direct labor) to distribute

the indirect costs to all products and services. This method of allocating indirect costs

commonly results in erroneous cost data. Often products which have high volume

(and high labor cost) are over costed. Likewise, the cost of lower volume products are

often understated, and many of the indirect costs of these products are overlooked.

Rather than relying on a single basis to distribute costs, ABC assigns costs to

activities and products based on how the costs (resources) are actually consumed by

the process or product. By moving away from traditional cost allocation methods and

using improved ABC methods of tracing and assignment, ABC provides managers

with a clearer picture of cost of processes and the profitability of customers and

products.

ABC OutputABM Decision Making Tools

Product and Customer Profitability

Revenues

Less Traceable Costs

Excess Revenues over Traceable Costs

Less Untraceable Costs (Total Costs less Traceable Costs)

Operating Income

Departmental Efficiency

Actual Costs Incurred versus Traceable Costs Assigned

If Traceable > Actual, department was efficient

If Traceable < Actual, department was inefficient

Strengths and Weaknesses

While the thought behind ABC makes sense, and the results would be of great

benefit for many companies, there are still some inherent problems with the

methodology.


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In some instances, costs can be defined, but where and how to assign them can

be extremely difficult. An example would be the salary of the companys CEO. This

is difficult to assign because there is no solid method of doing so. (Wikipedia.org)

Just because a cost cannot be assigned to a product or products does not mean that the

ABC method is seriously flawed and should be abandoned. According to Robert

Kaplan, one of the founding fathers of ABC, small inconsistencies are acceptable.

The objective is to be approximately right. (Kaplan and Anderson)

A strength of ABC, as has been mentioned throughout this paper, is having a

better understanding of what indirect or overhead costs go into the cost of a product.

Knowing exactly how much time and materials go into a product from all areas

instead of just the ones that are obvious is of great value to any organization. It leads

to more efficient processing in the manufacturing process, which in turn leads to

greater profits through realization of cost savings.

Specific Applications

There are too many specific applications of ABC to be listed here, but it will

suffice to say that many industries could see benefits from implementing an ABC

method, or at the very least identifying actual costs within a process.

One interesting example I found through my research was how United States

shipyards were being compared to Northern European shipyards in their conversion

from mainly military use to commercial shipbuilding. A large part of this study

required determining hidden costs within the process that are the result of bloat and

financial sloppiness that are inherent in the fulfillment of government contracts.

(Kvaerner Masa Marine INC Annapolis MD)

Conclusion

In conclusion, we can see that the methodology behind Activity-Based Costing

is sound, and can result in sometimes great savings to a company willing to take the

time, effort and expense to implement a plan. Although there are some pitfalls to the

process, with perseverance and a solid commitment from management, ABC can be

of great benefit to a manufacturing company.


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ANALYSIS


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DETAILS OF THE PRODUCT

Product name: wooden carton 4x6

Raw Material Requirements for the product

1) wooden sheet of length 1250*2500*1.2mm

2) Weight of the sheet is 30kg

3) 21 cartons can be prepared from one sheet.

4)

Sheets required to prepare 1000 units is 48sheets.

5) Cost of sheet per kg 37Rs.

6) Weight of a Cover = 30kg/21

=1.42kg

7) Gross Material cost per unit = 1.42 x Rs55

= Rs78.1/Cover

8) Process Generated Scrap =0.65 kgs

9) Scrap rate =Rs12/kg

10) Revenue generated from scrap = 0.65 x 10

= Rs 6.5

11) Net material cost = 78.16.5

= Rs71.6


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COSTING FOLLOWED BY THE COMPANY

Product: wooden carton 4x6

Number of units produced = 300000 cartons p.a

Particulars Total

cost(in Rs)

Cost/unit

(in Rs)

DIRECT COST

Direct Material (Raw Material Consumed) 3,05,73,918

Direct Wages 18,93,573

Direct Expenses 45,65,266

Prime Cost 3,70,32,757 123.4

FACTORY OVERHEADS

fuel oil & lubricant 1,58,029

Depreciation on machinery 8,04,853

Repairs and maintenance 3,91,235

Insurance 56,147

Rates and Taxes 2,61,532

Indirect material 14,73,273

Factory cost 31,45,069 10.48

ADMINISTRATIVE OVERHEADS

Printing and stationary 69,255

Postage and telegram 18,929

Newspapers and magazines 5,964

Professional charges 27,619

Office furniture 5,646

Leave with wages 7,095

Telephone expenses 1,75,338

Salary to partners 14,60,000


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Vehicle maintenance 72,347

Sundry expenses 84,809

Salary to staff 2,59,203

Cost Of Goods Sold 21,86,205 7.28

SELLING AND DISTRIBUTION

Advertisement expenses 3,410

Traveling expenses 1,82,480

Sales Promotion expenses 5,500

Packing charges 4,97,360 6,88,750

Cost Of Sales 4,30,52,781 143.50

PROFIT 52,81,095 17.6

SALES 4,83,33,876 161.1


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CALCULATION OF COST PER UNIT BY ACTIVITY BASED COSTING

1) Purchase of Raw material

a)

Raw material transport charges :

Weight of the goods 5000kgs (for the specified component) of sheet wooden

Delivered from J.P Nagar mysore to SAI PACKING LTD,MYSORE= Rs.600.00

Therefore charges per unit = Rs600/5000kgs

= Rs0.12/kg

Cost of per carton =1.42kg x Rs0.12

=Rs0.1704/carton

b) Loading and unloading Charges = Rs300.00/ton

5 Ton x Rs300 = Rs1500.00

Therefore charges for per unit = Rs1500/5000kgs

= Rs0.20/kgCost per carton =1.42 x Rs0.20

=Rs0.284/carton

Activity Sub Activity Cost Driver

Purchase Raw material transport Weight of product

Loading and unloading Weight of product

Storage Weight of product

Material cost Weight of product


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Total cost incurred for purchase of raw material

Activity Sub Activity Cost

Purchase Raw material transport Rs0.1704/carton

Loading and unloading Rs0.284/carton

Storage Rs0.00384/carton

Material cost Rs 94.72/carton

Total

Rs95.17


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2) Manufacturing cost

2) Manufacturing cost

Activity Sub Activity Activity Driver

Manufacturing Shearing Combination of man and

machine hour

Circle cuttingCombination of man and

machine hour

Deep drawingCombination of man and

machine hour

Trimming

Combination of man and

machine hour

PiercingCombination of man and

machine hour

Processlabo

r

Wages

per dayHours

Number

of

Covers

per 8

hrs

Cost of

Machin

e

Hp per

machin

e

Space

occupie

d by the

machin

e

Cost

per sq

ft

Shearing 3300/wo

rker8 1000 500000 5

100 sq

ft

Rs2

Circle

cutting1 150 8 800 100000 0.5

50 sq ft Rs 2

Deep

drawing2

150

&1358 800 800000 7

100sq ft Rs 2


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COST OF EACH PROCESS

1) Shearing

a)

Man cover rate: = wages/number of Covers

= Rs900/1000Covers

= 0.9/Cover rate

b) Machine cover rate =cost of machine x depreciation

=Rs500000 x 10% depreciation

=Rs50000 p.a

=Rs50000/300days

= Rs166.6per day

=Rs166.6/1000Covers

=Rs0.17/Cover

c) Space occupied by = 100 Sq ft x Rs 2 per sq ft

the machine= Rs200 p.m

= Rs200/26days

=Rs7.69/day

=Rs7.69/1000Covers

=Rs 0.00769/Cover

d)

calculation of electricity

Trimming 1 150 8 500 300000 380sq ft Rs 2

Piercing 1 150 8 900 400000 3 50 sq ft Rs 2


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Monthly electricity bill = 31,266

Monthly power consumption = 45hp

Therefore,

Rs31,266/45hp = Rs694.8 per hp/ month

Power Consumption = 5hp

For 5hp = Rs694.8 x 5hp = Rs3,474

Electricity bill per month = Rs3474.00

= Rs3474/26days

=133.61/day

=133.61/1000

=Rs0.1336/Cover

Fuel oil & lubricants = Rs1,58,028 p.a

= Rs 158028/ 300days

= Rs 526.76/day

= Rs 526.76/25machines

=Rs21.07/machine

=21.07/1000Covers

=0.021/Cover

Total Cost of shearing activity


Shearing Man cover rate Rs0.9/carton

Machine cover rate Rs0.17/carton


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Space occupied by the

machine

Rs0.00769/ carton

electricity Rs0.1336/ carton

Fuel oil & lubricants Rs0.021/ carton

Total

Rs 1.232/ carton

2. Circle cutting

a) Man cover rate =wages/number of Covers

= Rs150/800 carton

=Rs0.1875/ carton

b) Machine cover rate =Rs100000 x 10% depreciation=Rs10000 p.a

=Rs 10000/300days

=Rs33.33/per day

=Rs33.33/800 carton

=Rs0.0416/ carton

c) Space occupied by = 50Sq ft x Rs 2 per sq ft

the machine

= Rs100 p.m

= Rs100/26days

=Rs3.84/day

=Rs3.84/800 carton

=Rs 0.0048/ carton


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Total

Rs0.2766/ carton


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3. Deep drawing

a)

Man hour rate =wages/number of Covers

= Rs285/800 carton

=Rs0.3562/ carton

b) Machine hour rate =Cost of machine x Depreciation


=Rs80000 p.a

= Rs80000/300days

=Rs266.67/per day

=Rs266.67/800 carton

=Rs0.333/ carton


the machine

= Rs200 p.m

= Rs200/26days

=Rs7.69/day

=Rs7.69/800 carton

=Rs0.0096/ carton

d) calculation of electricity

Monthly electricity bill = Rs31,266


Therefore,



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For 7hp = Rs694.8 x 7hp = Rs4863.6


= Rs4863.6/26days

=187.06/day

=187.06/800 carton

=Rs0.233/ carton


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/800 carton

=0.026/ carton


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Total Cost of deep drawing activity


Deep Drawing Man cover rate Rs0.3562/ carton

Machine cover rate Rs0.333/ carton


machine

Rs0.0096/ carton



Total

Rs 0.9578/ carton

4. Trimming

a)

Man hour rate =Wages/number of Covers= Rs150/500 carton

=Rs0.3/ carton

b) Machine hour rate =Cost of machine x depreciation


=Rs30000 p.a

= Rs30000/300days

=Rs100/per day

=Rs100/500 carton

=Rs0.2/ carton


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the machine

= Rs160 p.m

= Rs160/26days

=Rs6.15/day

=Rs6.15/500 carton

=Rs 0.012/ carton




Therefore,



For 3hp = Rs694.8 x 3hp = Rs2084.4


= Rs2084.4/26days

=80.16/day

=80.16/500 carton

=Rs0.16/ carton


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/500 carton


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64

= Rs100/26days

=Rs3.84/day

=Rs3.84/900 carton

=Rs 0.0042/ carton




Therefore,



For 3hp = Rs694.8 x 3hp = Rs2084.4


= Rs2084.4/26days

=80.16/day

=80.16/900 carton

=Rs0.089/ carton


= Rs 158028/ 300days

= Rs 526.76/day


=Rs21.07/machine

=21.07/900 carton

=0.023/ carton

Total Cost of piercing activity


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Piercing Man cover rate Rs0.166/ carton

Machine cover rate Rs0.148/ carton


machine

Rs0.042/ carton



Total

Rs0.468/ carton


Manufacturing Shearing Rs1.232/ carton

Circle cutting Rs0.2766/ carton

Deep drawing Rs 0.9578/ carton

Trimming Rs 0.639/ carton

Piercing Rs0.468/ carton

Total

Rs3.5734/ carton


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Total Cost of the processes

3) Inspection

Inspection rate 10% of number of units produced per day

1000 carton x 10% = 100 carton to be inspected

1) Salary of the inspector = Rs8000/month

Time required to inspect = 1 hour

Per day salary = Rs8000/26days

=Rs307.69/day

Per hour salary =Rs 307.69/8hRs

= Rs 38.46/hr

Wages to the inspector = 1hr x Rs38.46

= Rs38.46/hr

2) Cost of instruments required to inspect = Rs 8500

Expected life of instrument is one year

Instruments charges per month = Rs8500/12months

= Rs708.33/month

Per day charges = Rs708.33/26 days

= Rs 27.24/day

Per hour charges = Rs27.24/8hrs

= Rs3.4/hr


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3) Calibration charges per year = Rs900

Per month charges = Rs900/12months

= Rs75/month

Per day charges = Rs75/26days

= Rs3/day

Per hour charges = Rs3/8hr

=Rs0.375/hr

Total of inspection activity


Inspection Salary of the inspector Rs38.46/hr

instruments required to

inspectRs3.4/hr

Calibration Rs0.375/hr

TotalRs42.23/hr

Cost of Per

Cover

Rs 0.0422/ carton


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4) Painting

.

1)

Cost of paint and thinner

Paint Rs250/ltr

Thinner Rs150/ltr

Divided in the ratio of 75:25

Cost of Paint = Rs250 x 75/100

=Rs 187.5

Cost of Thinner = Rs150 x 25/100

=Rs 37.5

Cost of mixture total = Rs187.5 + Rs37.5

= Rs225

Total Area of component covered by the mixture is 45 sq ft

Area of the a component = 1.72 sq ft

Covers that can be painted = 45sq ft/1.72sq ft

= 26Covers

Cost of paint per cover =Rs225/ 26 carton

= Rs8.6/ carton

2) Labour cost

People required for painting = 2

Wages per day = Rs 320

Covers painted in one day = 200 carton

Cost per cover = Rs320/200 carton

=Rs1.6/ carton


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3) Paint booth operation cost = Rs300000

Deprecation = 20% of the cost

=Rs 300000 x 20%

= Rs60000p.a

Per month = Rs60000/12months

=Rs5000p.m

Per day = Rs5000/26days

= Rs192.3/day

Cost of per covers =Rs 192.3/200 carton

=Rs0.961/carton

4) Power charges Rs 5500/month

Total Power consumption =20hp

Therefore,

Rs5500/20hp =Rs275per hp/month

Power consumption =5hp

For 5hp =5hp x Rs275

Electricity bill per month for 5hp =Rs1375

Per day charges = Rs1375/26days

= Rs53/day

Per cover charges =Rs53/200 carton

=Rs0.265/ carton


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5)Area of painting booth = 60 x 20ft

Rent = 20000 p.m

Built area = 10000sq ft

Rent per sq ft = Rs30000/10000sq ft

= Rs3/sq ft/month

Cost of area = 1200sq ft x Rs3

= Rs 3600

Per day charges =Rs3600/26

= Rs138.46/day

Per cover =Rs138.46/200 carton

= Rs0.692/ carton

Area of the Cover = 1.72sq ft

Cost of per cover= Rs12.11 x 1.72sq ft

= Rs20.82/ carton

Total cost of painting activity


Painting Cost of paint and thinner Rs8.6

Labour cost Rs1.6

Paint booth operation cost Rs0.961

Power charges Rs0.265

Area of painting booth Rs0.692

Rs12.11/sq ft


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Total

Cost of Per

carton

Rs20.82/carton

5) Dispatching

1)

Packing charges:

Packing material required: ---

Cost of wooden box = Rs 3000 (inclusive transportation cost, taxes)

Cost of plastic wire = Re 1.50/ carton

Cost of paper = Re1.00/ carton

Number of Covers packed per box = 200 carton

Rs3000 + (Re1.50 x 200) + (Re1.00 x 200) = Rs3500

2) LabourPeople required = 3

5 boxes packed per day

Wages = Rs200 + Rs150 + Rs150

= Rs500/day

Wages per box = Rs500/5boxes

= Rs100/box

Total =Rs 3500 + Rs100

= Rs 3600

Per Cover = Rs3600/200 carton

=Rs18/ carton

Total of dispatching Activity


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Despatching Packing charges Rs3500

labour Rs100

Total

Cost Per

carton

Rs3600/box

Rs18/carton

COST PER UNIT OF THE PRODUCT

ACTIVITIESAmount

in Rs

COST/carton

Amt in Rs

1 PURCHASE OF RAW

MATERIALS

95.017

2 MANUFACTURING

Shearing 1.232

Circle cutting 0.2766

Deep drawing 0.9578

Trimming 0.639

Piercing 0.468

Total 3.5734

3 INSPECTION 0.0422

4 PAINTING 19.90

5 DESPATCHING 18.00

GRAND

TOTAL

136.68


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FINDINGS


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FINDINGS

1. SAI PACKING LTD, MYSOREare specialized in deep drawn components

that cater the electrical, elevator, home appliances automobile industry and the

defense.

2. SAI PACKING LTD, MYSOREfollows traditional method of costing.

3. The product carton is over costed.

4. According to traditional costing the cost of the cover is Rs.143.50

5.

According to Activity Based costing the cost of the cover is Rs136.68

6. According to costing followed by SAI PACKING LTD, MYSOREthey first

identify the cost then they go for producing the product rather than identifying

the activities first.

7. Appropriate variable overheads are identified to individual products through

ABC.

8. All levels of activities in the manufacturing cost hierarchy viz unit level, batch

level, product level and facility level have been identified.

9. Cost drivers for the activities have been identified.

10.SAI PACKING LTD, MYSORErelates overheads to cost centers which are

not realistic to the behavior of costs.

11.To get a realistic analysis of cost behavior, the overheads have been properly

related to cost drivers.


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SUGGESTIONS


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SUGGESTIONS

1.

SAI PACKING LTD, MYSORE should adopt Activity Based costing in

their organization.

2. As ABC integrates well with Six Sigma and continuous improvement

programs the company can achieve minimum rejection rate.

3. To arrive at the actual cost of the product, overheads should not be directly

assigned to the cost center which is basically done in traditional costing.

4. Instead of focusing more on cost reduction they should focus more on cost

control.

5. SAI PACKING LTD, MYSOREcan adopt cost control strategy where in the

company can begin by evaluating non-labor expenses which can be controlled.

6. Labor and employment costs are a source of considerable expense and should

be constantly monitored.

7. If it is possible to amalgamate two jobs into one, make some jobs part time,

use temporary contract labor, outsourcing to specialists, consider if some other

choice of labor cost saving is available.

8. SAI PACKING LTD, MYSOREshould follow an open style with clear and

concise objective for the successful implementation of ABC.

9. Organization-wide awareness should be extended to convince the participants

to change, as well as effecting the change.

10.Overheads are part of running a business but can be controlled. Everything

from cleaning materials to the cost of vehicle operation , machine

maintenance, consumable materials and staff employment costs can, and must

be kept as low as possible.


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CONCLUSION


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BIBLOGRAPHY


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BIBLOGRAPHY

Books : 1) COST ACCOUNTING for BUSINESS

MANAGERS by Asish K Bhatacharyya.

2) COST ACCOUNTING by I M Pandey

Websites : babasabpatilfreeppt.com

ABC Full Project

Documents