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Activity Based Costing
INDEX
Sr.No. CONTENTS Page No.
1 Executive summary 1-2
2 Industry Profile 3-5
3 Organization profile 6-8
4 History of Akash Industries 9-12
5 Company at a glance 13-18
6 Research Methodology 19-21
7 Data Collection 22-23
8 Conceptual Framework 24-33
10 Analysis 34-57
11 Findings 58-59
12 Suggestions 60-61
13 Conclusion 62-63
14 Bibliography 64-65
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Activity Based Costing
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
A study report on “ACTIVITY BASED COSTING AS A MEASURE OF IMPROVING
THE COST STRUCTURE OF AKASH INDUSTRIES”, a project undertaken at AKASH
INDUSTRIES BELGAUM.
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Activity Based Costing
Activity-Based Costing (ABC) represents an alternative paradigm to traditional cost
accounting system and it often provides more accurate cost information for decision making
such as product pricing, product mix, and make-or buy decisions. ABC models the causal
relationships between products and the resources used in their production and traces the cost
of products according to the activities through the use of appropriate cost drivers.
In this project, the costing system followed by Akash Industries is compared
with ABC in terms of the effects on the product costs that are carried out to highlight the
difference between two costing methodologies. By using this methodology, a valuable
insight into the factors that cause the cost is provided, helping to better manage the activities
of the company.
According to the study, Akash Industries follows traditional method for costing
that assigns overheads directly to the product. Cost of the product UC Range series 4 end
cover is found out by Activity Based costing and is compared with the traditional method
followed by Akash Industries to arrive at the cost of the above product. The study states that
the product is being over cost by the company.
Akash Industries should 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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Activity Based Costing
INDUSTRY PROFILE
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
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Activity Based Costing
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.
India’s 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 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
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Activity Based Costing
manufacturing activities.
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Activity Based Costing
ORGANIZATION PROFILE
ORGANIZATIONAL PROFILE
Akash Industries, a pioneer in the manufacture of sheet metal pressed components was
established in the year 1977. Ever since, it has grown into a big organization with a focus in
quality in everything.
An ISO 9001-2000 Company with a good customer base in the domestic as well as the
International market activities of Akash Industries include tool design also with a highly
skilled & professional work force, tools is designed for the components as per the customer
requirements. Their specialty being the deep drawn components, they cater the electrical,
elevator, home appliances automobile industry and the defense.
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Activity Based Costing
Akash Industries are in it for a long haul with a focus on continual improvement. They
are having mechanical presses ranging from 10T to 80T capacity & hydraulic presses
ranging from 10T to 250T capacity, out of which 50T, 80T, 160T & 250T hydraulic presses
are double acting presses to carry out deep drawing operations. They also use triple acting
arrangement for some of these machines to carryout more precision items & to make
multiple operations at a time.
Apart from this, shearing machine of capacity 3.0mm x 2500mm & 10mm x 2000mm
both hydraulically operated are installed for better cutting accuracy. The other relevant
machineries such as welding transformers, spot welding, grinding, and circle cutting
machines are installed to support our manufacturing activity with maximum productivity.
The two material handling equipments for loading & unloading of tools are in place to make
setting faster and easier. The separate tool maintenance area to carry out maintenance of tool
is provided with surface grinding & drilling machines to attend immediate rectification, such
as sharpening of punches & dies. They are equipped with 62 KVA generators to overcome
power failure. The painting facility with 7 tank process of components before painting is
available. The painting booth & drier for quick drying is also installed to give our customers
a complete satisfaction by supplying ready for fitment components.
Akash Industry have the pride to have clients from various industries many of them are well
- known in the global industrial community. Some of our esteemed clients are as under:-
• Cummins Generator Technologies
• OTIS Elevator (I) Ltd.
• Trident Power craft Pvt. Ltd.
• Crompton Greaves Ltd
• Kaytee Switch Gears Ltd.
• IFB India
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Activity Based Costing
HISTORY OF AKASH
INDUSTRIES
HISTORY OF AKASH INDUSTRIES
Akash Industries
M-15, Industrial Estate,
Udyambag, Belgaum – 590 008
Mr. Sadanand T Macha completed his DIPLOMA IN TOOL AND DIE MAKING from
NETTUR TECHNICAL TRAINING FOUNDATION, DHARWAR (NTTF). Then he
served at Hyderabad Tool Pvt. Ltd, Hyderabad, as a highly skilled Mechanic for a period of
one and half years. Because of the climatic conditions he left Hyderabad and came back to
Belgaum and joined M/s. Pusalkar Engineers, Belgaum. He started working under Mr. V B
Inamdar (Present Partner). It was here that he learnt i.e., from Purchases, Production,
Inspection and Despatch, Etc for a period of one and half yeaRs. In M/s Pusalkar Engineers
he came in contact with M/s Kirloskar Electric Co. Ltd. Bangalore & Hubli. Having gained
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the experience and he left M/s Pusalkar Engineers, Belgaum and was idle for 2 to 3 months.
Meanwhile Shri V B Inamdar also left M/s Pusalkar Engineers and they both decided to start
their own business.
In the year 1977, they both started their own business in the name of M/s Akash Industries.
They had neither place nor financial support. With a mere Rs. 3000/- they went on to
purchase a wielding machine and started in their own garage at Angol ‘C’ scheme. Initially it
was only fabrication work that they used to carry out. But with this type of work it was
impossible for both of them to meet their ends. By this time 6 months had passed. They
really had a tough time and a tougher time to Mr. Inamdar who was married and had 3
childrens. Meanwhile, they felt that they should better join any service. Even to approach
somebody for work, they didn’t had the requisite finance. With the help of Mr. Inamdar’s,
brother in law, who was working in West Coast Paper Mills Limited Dandeli, they could get
an entry. Initially, they gave them maintenance jobs, which they used to get the things from
their fellow industrialists and supply the same. Months passed by and they felt that how they
can ever survive with this little earning. It was even difficult for them to go by bus and many
a times they used to travel by truck to Dandeli, finish their work and again return back to
Belgaum, by some means with hardly a few chips in their pockets. This continued for a year
and half. It was at this time that Shri A G Tembe, of M/s Ohm Electricals, gave them shelter
in his shed at Industrial estate. Here they prolonged their business for 2 years supplying
maintenance jobs. Doing fabrication work and even if necessary they used to carry the
wielding machine to customers place and carry out the work.
Their major problem was finance and how to expand their engineering activities was a big
question mark for them. But since they had no shed or own machinery they could not
approach the engineering companies.
However, in the year 1979, they got an Industrial Plot of 10 Guntas from KSSIDC LTD,
through the help of Late Shri N A Hanamannavar, the then Chairman of the City
Improvement Board. They approached State Bank Of India for financial assistance and it
was at this juncture that they really helped them to construct their own shed and purchase of
machinery. Their Working capital of Rs. 10,000 was also sanctioned. With the vast
experience of Mr. V B Inamdar, I.e of more than 15 years and his previous contacts. They
approached M/s KIRLOSKAR ELECTRIC COMPANY LIMITED. BANGALORE and M/s
LARSEN & TOUBRO LTD. BANGALORE. Since, their line of activity was only Sheet
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Metal Components, they could get a good amount of workload. They proved themselves by
quality and delivery. More and more work started coming in and somehow they had to meet
their urgency with having only few machines. Having got confidence, they expanded their
own shed and added few more machines of a higher capacity. They approached M/s
CROMPTON GREAVES LTD. AHMEDNAGAR, AUTOMOBILE CORPORATION OF
GOA LTD. KIRLOSKAR ELECTRIC CO. HBL PEENYA & PUNE. In a span of two to
three years their business increased multifold. Capacity reached a saturated point and they
were not in position to meet their high demands and they had to add some higher capacity of
Hydraulic Presses converting the same into double acting and triple acting. This increased
their supply position.
In the year 1984, they started another partnership concern in the name of M/S
KARNATAKA METAL PRESSING just near to their existing concern taking Mr. P A
Bagewadi and Mr. S K Yatgeri as additional partners. Here their basic activity was only to
manufacture Pole bricks of different capacities for alternators. At present their turnover
stands at Rs 45 Lakh per month.
In the year 1988, they got an order from M/s AMMUNITION FACTORY, PUNE for
supplying of Aluminum Cartridge cases purely an import substitute. For this special purpose
machines were acquired with the most accurate toolings and precious inspection equipments
to meet their highest accuracy and quality. These cartridge cases are used to make Anti Riot
Rubber Bullets, which are used by the Police Department during Anti Riots. This was their
biggest achievement that they had in their last 29 years.
AKASH INDUSTRIES major activities are manufacturing of Sheet Metal Pressed
Components for Alternator, Motor, Automobile Parts and items required by customers to
their required specifications.
In the words of Mr. S T Macha “This is all due to hard and sincere work and the backing of
our fellow industrialists who have supported us in all our difficult times”.
“Our aim is to do sincere and hard work giving more attention to quality and delivery. This
is what every one wants in this world of competition”.
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Activity Based Costing
COMPANY PROFILE
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Activity Based Costing
COMPANY PROFILE
Name of the Organization : Akash Industries
Type of Industry : Manufacturing Industry.
Address : Akash Industries
M-15, Industrial Estate,
Udyambag, Belgaum – 590 008
Partners : S.T Macha
V.B Inamdar
M.V Inamdar
A.S Macha
Established : 1977
Size and nature of the company :
Sales
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Activity Based Costing
FY08-09 : Rs48,333,876.81
Employees : 50
QUALITY POLICY AT AKASH INDUSTRIES
1. To meet customers requirement and strive to exceed customer expectations.
2. Manage all activities and related resources as a process.
3. Create and maintain an environment in which personnel are fully involved in
achieving organization objectives so as to ensure continual improvement and growth.
4. Take decisions and implement necessary actions based upon analysis of data and
information.
5. Involve all our suppliers in quality improvement process as to ensure mutually
beneficial and long time relationship.
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Activity Based Costing
ORGANIZATION CHART
1
Shop
Incharge
Chief
Accountant
Incharge
Excise
Incharge
Sales Tax
Managing partner 1 Managing partner 2
In charge
QA/QC
Cashier
Management
Representative
Deputy
Management
Representative
Plant
Supervisor 1
Activity Based Costing
PRODUCTS MANUFACTURED BY AKASH INDUSTRIES
Components are manufactured as per the customer requirements. They are catering at
present the industries like electrical, elevators & home appliances, specialization being deep
drawn components using C.R. & H.R. as the raw material, with thickness of material varying
from 1 mm CRCA to 8mm H.R.
1
Plant
supervisor 2
In charge
stores
Workers
Activity Based Costing
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
 Kirloskar Electric co. Hubli
 Mallik Engineering , Bangalore
 Telco Construction Equipment, Dharwad
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Activity Based Costing
RESEARCH METHODOLOGY
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Activity Based Costing
RESEARCH METHODOLOGY
The Study:
The present study is an attempt to understand and ascertain the costing method followed in
Akash Industries 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 Akash Industries.
• To identify activities involved in manufacturing of UC Range series 4 end cover.
• To identify cost of the activities involved in manufacturing the product UC Range
series 4 end cover.
• To allocate the cost for the activities.
• To find the cost per unit of the product UC Range series 4 end cover.
• To compare existing costing method followed by Akash Industries with Activity
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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 AKASH INDUSTRIES. It involves
finding out the cost per unit of the product UC Range series 4 end cover by following
Activity based Costing.
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 Akash
Industries (Mr.Sunil Kundap) .
¬ 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 year’s balance sheet of Akash
Industries.
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¬ Books on cost accounting were referred.
¬ Company website
Limitations of the study:
• The study is limited to AKASH INDUSTRIES only.
• In order to maintain confidentiality some information could not be disclosed by
Akash Industries.
CONCEPTUAL FRAMEWORK
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Activity Based Costing
ACTIVITY BASED COSTING
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. The goal 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 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
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Activity Based Costing
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.
What's what 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
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Activity Based Costing
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.
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.
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Activity Based Costing
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 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
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VIEW
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.
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COST
DRIVERS
ACTIVITIES PERFORMANCE
MEASURES
RESOURCES
OBJECTS
OF WORK
ACTIVITY
DRIVERS
RESOURCE
DRIVERS
Activity Based Costing
ABC categorizes the activities into:
Unit level activities:
θ Performed each time a unit is produced.
θ Consumed in direct proportion to the number of units produced.
θ E.g. Direct materials, Energy costs, direct labour, etc.
Batch related activities:
θ Performed each time a batch of goods is produced.
θ Consumed in direct proportion the number of batches produced.
θ Fixed for all units within a batch.
θ E.g. set up resources, purchasing resources.
Product sustaining activities:
θ Performed to support and sustain different products/services on the product life
cycle.
θ Consumption varies with the variety of products/services and the stage of the Product
Life Cycle the products/services are in.
θ E.g. designing the product.
Facility sustaining activities:
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Activity Based Costing
θ Performed for supporting the happening of the above three types of activities and
providing the platform/infrastructure.
θ These are generally fixed for a certain scale/scope of operations over a period of
time.
θ E.g. Administration, plant maintenance, accounting, etc.
θ These costs are deducted lump sum from operating margins of all product lines.
ABC establishes inputs and outputs to and from each activity, Inputs to one activity may be
outputs from another and there could also be interactive relationships among activities.
Hierarchy of Activities and Activity based profitability analysis
Sales Revenue
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)
= batch – level 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.
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Activity Based Costing
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 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.
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Activity Based Costing
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.
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.
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Activity Based Costing
ACTIVITY BASED COSTING ADVANTAGES
• More accurate costing of products/services, customers, distribution channels.
• Better understanding overheads.
• Easier to understand for everyone.
• Utilizes unit cost rather 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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Activity Based Costing
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.
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Activity Based Costing
ANALYSIS
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Activity Based Costing
DETAILS OF THE PRODUCT
Product name: UC Range series 4 end cover
Raw Material Requirements for the product
1) Metal sheet of length 1250*2500*1.2mm
2) Weight of the sheet is 30kg
3) 21 Covers can be prepared from one metal sheet.
4) Sheets required to prepare 1000 units is 48sheets.
5) Cost of sheet metal 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 = 78.1– 6.5
= Rs71.6
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Activity Based Costing
COSTING FOLLOWED BY THE COMPANY
Product: UC Range series 4 end cover
Number of units produced = 300000 Covers 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
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
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Activity Based Costing
Cost Of Sales 4,30,52,781 143.50
PROFIT 52,81,095 17.6
SALES 4,83,33,876 161.1
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 metal
Delivered from R.C Nagar Belgaum to Akash industries Belgaum = Rs.600.00
Therefore charges per unit = Rs600/5000kgs
= Rs0.12/kg
Cost of per cover =1.42kg x Rs0.12
=Rs0.1704/cover
b) Loading and unloading Charges = Rs300.00/ton
5 Ton x Rs300 = Rs1500.00
Therefore charges for per unit = Rs1500/5000kgs
= Rs0.20/kg
Cost per cover =1.42 x Rs0.20
=Rs0.284/cover
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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
Activity Based Costing
c) Storage charges = space required 10 x 5ft
Rent 20000/month
Building area = 10000sq ft
Storage Cost =50sq ft x Rs2.00
=Rs100.00/- p.m
Storage cost per day =Rs100/26Days
=Rs3.84/day
Storage cost per Cover =Rs3.84/1000Covers
=Rs0.00384/cover
d) Material cost = 5000kgs x Rs 71.28 (exclusive of
transport and loading and unloading
charges)
= Rs3,56,400
=5000kgs/1.42wt per kg
=3521 Covers
=Rs3,56,400/3521 Covers
=Rs101.22 – scrap
=Rs101.22– Rs6.5
=Rs94.72/cover
Total cost incurred for purchase of raw material
Activity Sub Activity Cost
Purchase Raw material transport Rs0.1704/cover
Loading and unloading Rs0.284/cover
Storage Rs0.00384/cover
Material cost Rs 94.72/cover
Total Rs95.17
2) Manufacturing cost
1
Activity Based Costing
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
1
Activity Sub Activity Activity Driver
Manufacturing Shearing Combination of man and
machine hour
Circle cutting Combination of man and
machine hour
Deep drawing Combination of man and
machine hour
Trimming Combination of man and
machine hour
Piercing Combination of man and
machine hour
Process labor Wages
per day
Hours Number
of
Covers
per 8 hrs
Cost of
Machine
Hp per
machine
Space
occupie
d by the
machine
Cost
per sq
ft
Shearing 3 300/wor
ker
8 1000 500000 5 100 sq ft Rs2
Circle
cutting
1 150 8 800 100000 0.5 50 sq ft Rs 2
Deep
drawing
2 150
&135
8 800 800000 7 100sq ft Rs 2
Trimming 1 150 8 500 300000 3
80sq ft Rs 2
Piercing 1 150 8 900 400000 3 50 sq ft Rs 2
Activity Based Costing
=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
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
1
Activity Based Costing
=0.021/Cover
Total Cost of shearing activity
Activity Sub Activity Cost
Shearing Man cover rate Rs0.9/cover
Machine cover rate Rs0.17/cover
Space occupied by the
machine
Rs0.00769/cover
electricity Rs0.1336/cover
Fuel oil & lubricants Rs0.021/cover
Total Rs 1.232/cover
2. Circle cutting
a) Man cover rate =wages/number of Covers
= Rs150/800Covers
=Rs0.1875/Cover
b) Machine cover rate =Rs100000 x 10% depreciation
=Rs10000 p.a
=Rs 10000/300days
=Rs33.33/per day
=Rs33.33/800Covers
=Rs0.0416/Cover
c) Space occupied by = 50Sq ft x Rs 2 per sq ft
the machine
= Rs100 p.m
= Rs100/26days
1
Activity Based Costing
=Rs3.84/day
=Rs3.84/800Covers
=Rs 0.0048/Cover
e) calculation of electricity
Monthly electricity bill = Rs31,266
Monthly power consumption = 45hp
Therefore,
Rs31,266/45hp = Rs694.8 per hp/ month
Power Consumption = 0.5hp
For 0.5hp = Rs694.8 x 0.5hp = Rs347.4
Electricity bill per month = Rs347.4
= Rs347.4/26days
=13.36/day
=13.36/800Covers
=Rs0.0167/Cover
Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
=Rs21.07/machine
=21.07/800Covers
=0.026/Cover
Total Cost of circle cutting activity
1
Activity Based Costing
Activity Sub Activity Cost
Circle cutting Man cover rate Rs0.1875/cover
Machine cover rate Rs0.0416/cover
Space occupied by the
machine
Rs0.0048/cover
electricity Rs0.0167/cover
Fuel oil & lubricants Rs0.026/cover
Total Rs0.2766/cover
3. Deep drawing
a) Man hour rate =wages/number of Covers
= Rs285/800Covers
=Rs0.3562/Cover
b) Machine hour rate =Cost of machine x Depreciation
=Rs800000 x 10% depreciation
=Rs80000 p.a
= Rs80000/300days
=Rs266.67/per day
=Rs266.67/800Covers
=Rs0.333/Cover
c) Space occupied by = 100Sq ft x Rs 2 per sq ft
the machine
= Rs200 p.m
= Rs200/26days
=Rs7.69/day
=Rs7.69/800Covers
=Rs0.0096/Cover
1
Activity Based Costing
d) calculation of electricity
Monthly electricity bill = Rs31,266
Monthly power consumption = 45hp
Therefore,
Rs31,266/45hp = Rs694.8 per hp/ month
Power Consumption = 7hp
For 7hp = Rs694.8 x 7hp = Rs4863.6
Electricity bill per month = Rs4863.6
= Rs4863.6/26days
=187.06/day
=187.06/800Covers
=Rs0.233/Cover
Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
=Rs21.07/machine
=21.07/800Covers
=0.026/Cover
Total Cost of deep drawing activity
Activity Sub Activity Cost
Deep Drawing Man cover rate Rs0.3562/cover
Machine cover rate Rs0.333/cover
Space occupied by the Rs0.0096/cover
1
Activity Based Costing
machine
electricity Rs0.233/cover
Fuel oil & lubricants Rs0.026/cover
Total Rs 0.9578/cover
4. Trimming
a) Man hour rate =Wages/number of Covers
= Rs150/500Covers
=Rs0.3/Cover
b) Machine hour rate =Cost of machine x depreciation
=Rs300000 x 10% depreciation
=Rs30000 p.a
= Rs30000/300days
=Rs100/per day
=Rs100/500Covers
=Rs0.2/Cover
c) Space occupied by = 80Sq ft x Rs 2 per sq ft
the machine
= Rs160 p.m
= Rs160/26days
=Rs6.15/day
=Rs6.15/500Covers
=Rs 0.012/Cover
d) calculation of electricity
Monthly electricity bill = Rs31,266
Monthly power consumption = 45hp
Therefore,
1
Activity Based Costing
Rs31,266/45hp = Rs694.8 per hp/ month
Power Consumption = 3hp
For 3hp = Rs694.8 x 3hp = Rs2084.4
Electricity bill per month = Rs2084.4
= Rs2084.4/26days
=80.16/day
=80.16/500Covers
=Rs0.16/Cover
Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
=Rs21.07/machine
=21.07/500Covers
=0.042/Cover
Total Cost of trimming activity
Activity Sub Activity Cost
Trimming Man cover rate Rs0.3/cover
Machine cover rate Rs0.125/cover
Space occupied by the
machine
Rs0.012/cover
electricity Rs0.16/cover
Fuel oil & lubricants Rs0.042/cover
Total Rs 0.639/cover
1
Activity Based Costing
5. Piercing
a) Man hour rate
=Rs 150/900Covers
=0.166/Cover
b) Machine hour rate =400000 x 10% depreciation
=40000 p.a
= 40000/300days
=133.33/per day
=133.33/900Covers
=0.148/Cover
c) Space occupied by = 50Sq ft x Rs 2 per sq ft
the machine
= Rs100 p.m
= Rs100/26days
=Rs3.84/day
=Rs3.84/900Covers
=Rs 0.0042/Cover
d) calculation of electricity
Monthly electricity bill = Rs31,266
Monthly power consumption = 45hp
Therefore,
Rs31,266/45hp = Rs694.8 per hp/ month
1
Activity Based Costing
Power Consumption = 3hp
For 3hp = Rs694.8 x 3hp = Rs2084.4
Electricity bill per month = Rs2084.4
= Rs2084.4/26days
=80.16/day
=80.16/900Covers
=Rs0.089/Cover
Fuel oil & lubricants = Rs1,58,028 p.a
= Rs 158028/ 300days
= Rs 526.76/day
= Rs 526.76/25machines
=Rs21.07/machine
=21.07/900Covers
=0.023/Cover
Total Cost of piercing activity
Activity Sub Activity Cost
Piercing Man cover rate Rs0.166/cover
Machine cover rate Rs0.148/cover
Space occupied by the
machine
Rs0.042/cover
electricity Rs0.089/cover
Fuel oil & lubricants Rs0.023/cover
Total Rs0.468/cover
1
Activity Based Costing
Total Cost of the processes
3) Inspection
Inspection rate 10% of number of units produced per day
1000Covers x 10% = 100Covers to be inspected
1
Activity Sub Activity Cost
Manufacturing Shearing Rs1.232/cover
Circle cutting Rs0.2766/cover
Deep drawing Rs 0.9578/cover
Trimming Rs 0.639/cover
Piercing Rs0.468/cover
Total Rs3.5734/cover
Activity Based Costing
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
3) Calibration charges per year = Rs900
Per month charges = Rs900/12months
= Rs75/month
Per day charges = Rs75/26days
1
Activity Based Costing
= Rs3/day
Per hour charges = Rs3/8hr
=Rs0.375/hr
Total of inspection activity
Activity Sub Activity Cost
Inspection Salary of the inspector Rs38.46/hr
instruments required to
inspect
Rs3.4/hr
Calibration Rs0.375/hr
Total Rs42.23/hr
Cost of Per Cover Rs 0.0422/cover
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
1
Activity Based Costing
=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/ 26Covers
= Rs8.6/Cover
2) Labour cost
People required for painting = 2
Wages per day = Rs 320
Covers painted in one day = 200 Covers
Cost per cover = Rs320/200covers
=Rs1.6/cover
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
1
Activity Based Costing
Cost of per covers =Rs 192.3/200Covers
=Rs0.961/Cover
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 =Rs53/200Covers
=Rs0.265/Cover
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 =Rs138.46/200Covers
1
Activity Based Costing
= Rs0.692/Cover
Area of the Cover = 1.72sq ft
Cost of per cover = Rs12.11 x 1.72sq ft
= Rs20.82/cover
Total cost of painting activity
Activity Sub Activity Cost
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
Total Rs12.11/sq ft
Cost of Per Cover Rs20.82/cover
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/Cover
Cost of paper = Re1.00/Cover
Number of Covers packed per box = 200 covers
Rs3000 + (Re1.50 x 200) + (Re1.00 x 200) = Rs3500
2) labour
People required = 3
5 boxes packed per day
Wages = Rs200 + Rs150 + Rs150
1
Activity Based Costing
= Rs500/day
Wages per box = Rs500/5boxes
= Rs100/box
Total =Rs 3500 + Rs100
= Rs 3600
Per Cover = Rs3600/200Cover
=Rs18/Cover
Total of dispatching Activity
Activity Sub Activity Cost
Despatching Packing charges Rs3500
labour Rs100
Total
Cost Per Cover
Rs3600/box
Rs18/Cover
COST PER UNIT OF THE PRODUCT
1
ACTIVITIES
Amount
in Rs
COST/COVER
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
Activity Based Costing
FINDINGS
1
Activity Based Costing
FINDINGS
1. Akash Industries are specialized in deep drawn components that cater the electrical,
elevator, home appliances automobile industry and the defense.
2. Akash Industries follows traditional method of costing.
3. The product UC Range series 4 end cover 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 Akash Industries they 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. Akash Industries relates 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.
1
Activity Based Costing
SUGGESTIONS
1
Activity Based Costing
SUGGESTIONS
1. Akash Industries 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. Akash Industries can 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. Akash Industries should 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
1
Activity Based Costing
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.
CONCLUSION
1
Activity Based Costing
CONCLUSION
ABC utilizes the activity concept and by using the activities, ABC can successfully link the
product costs to production knowledge. How a product is produced, how much time is
needed to perform an activity and finally how much money is absorbed by performing this
task are answered by the help of ABC studies. This method is a dynamic tool for continuous
improvement. With ABC to its benefit, any enterprise will have a built in competitive cost
advantage and can continuously add value to both its stakeholders and customers.
Therefore, Activity-Based Costing measures the costs and profits of an organization based
on the activities performed within that organization. By focusing on processes that contribute
to revenues and business operations, ABC can accurately determine how each process relates
back to specific products, customers, or services. This can make a big difference after
considering warehouse, sales, customer service, administration and other costs that are often
applied at a standard rate, if at all. With ABC you can drill into profitability and performance
by almost any factor you can think of.
1
Activity Based Costing
BIBLOGRAPHY
1
Activity Based Costing
BIBLOGRAPHY
¬ Books : 1) COST ACCOUNTING for BUSINESS
MANAGERS by Asish K Bhatacharyya.
2) COST ACCOUNTING by I M Pandey
1

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“Activity based costing ' a project report @doms

  • 1. Activity Based Costing INDEX Sr.No. CONTENTS Page No. 1 Executive summary 1-2 2 Industry Profile 3-5 3 Organization profile 6-8 4 History of Akash Industries 9-12 5 Company at a glance 13-18 6 Research Methodology 19-21 7 Data Collection 22-23 8 Conceptual Framework 24-33 10 Analysis 34-57 11 Findings 58-59 12 Suggestions 60-61 13 Conclusion 62-63 14 Bibliography 64-65 1
  • 2. Activity Based Costing EXECUTIVE SUMMARY EXECUTIVE SUMMARY A study report on “ACTIVITY BASED COSTING AS A MEASURE OF IMPROVING THE COST STRUCTURE OF AKASH INDUSTRIES”, a project undertaken at AKASH INDUSTRIES BELGAUM. 1
  • 3. Activity Based Costing Activity-Based Costing (ABC) represents an alternative paradigm to traditional cost accounting system and it often provides more accurate cost information for decision making such as product pricing, product mix, and make-or buy decisions. ABC models the causal relationships between products and the resources used in their production and traces the cost of products according to the activities through the use of appropriate cost drivers. In this project, the costing system followed by Akash Industries is compared with ABC in terms of the effects on the product costs that are carried out to highlight the difference between two costing methodologies. By using this methodology, a valuable insight into the factors that cause the cost is provided, helping to better manage the activities of the company. According to the study, Akash Industries follows traditional method for costing that assigns overheads directly to the product. Cost of the product UC Range series 4 end cover is found out by Activity Based costing and is compared with the traditional method followed by Akash Industries to arrive at the cost of the above product. The study states that the product is being over cost by the company. Akash Industries should 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. 1
  • 4. Activity Based Costing INDUSTRY PROFILE 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 1
  • 5. Activity Based Costing 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. India’s 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 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 1
  • 7. Activity Based Costing ORGANIZATION PROFILE ORGANIZATIONAL PROFILE Akash Industries, a pioneer in the manufacture of sheet metal pressed components was established in the year 1977. Ever since, it has grown into a big organization with a focus in quality in everything. An ISO 9001-2000 Company with a good customer base in the domestic as well as the International market activities of Akash Industries include tool design also with a highly skilled & professional work force, tools is designed for the components as per the customer requirements. Their specialty being the deep drawn components, they cater the electrical, elevator, home appliances automobile industry and the defense. 1
  • 8. Activity Based Costing Akash Industries are in it for a long haul with a focus on continual improvement. They are having mechanical presses ranging from 10T to 80T capacity & hydraulic presses ranging from 10T to 250T capacity, out of which 50T, 80T, 160T & 250T hydraulic presses are double acting presses to carry out deep drawing operations. They also use triple acting arrangement for some of these machines to carryout more precision items & to make multiple operations at a time. Apart from this, shearing machine of capacity 3.0mm x 2500mm & 10mm x 2000mm both hydraulically operated are installed for better cutting accuracy. The other relevant machineries such as welding transformers, spot welding, grinding, and circle cutting machines are installed to support our manufacturing activity with maximum productivity. The two material handling equipments for loading & unloading of tools are in place to make setting faster and easier. The separate tool maintenance area to carry out maintenance of tool is provided with surface grinding & drilling machines to attend immediate rectification, such as sharpening of punches & dies. They are equipped with 62 KVA generators to overcome power failure. The painting facility with 7 tank process of components before painting is available. The painting booth & drier for quick drying is also installed to give our customers a complete satisfaction by supplying ready for fitment components. Akash Industry have the pride to have clients from various industries many of them are well - known in the global industrial community. Some of our esteemed clients are as under:- • Cummins Generator Technologies • OTIS Elevator (I) Ltd. • Trident Power craft Pvt. Ltd. • Crompton Greaves Ltd • Kaytee Switch Gears Ltd. • IFB India 1
  • 10. Activity Based Costing HISTORY OF AKASH INDUSTRIES HISTORY OF AKASH INDUSTRIES Akash Industries M-15, Industrial Estate, Udyambag, Belgaum – 590 008 Mr. Sadanand T Macha completed his DIPLOMA IN TOOL AND DIE MAKING from NETTUR TECHNICAL TRAINING FOUNDATION, DHARWAR (NTTF). Then he served at Hyderabad Tool Pvt. Ltd, Hyderabad, as a highly skilled Mechanic for a period of one and half years. Because of the climatic conditions he left Hyderabad and came back to Belgaum and joined M/s. Pusalkar Engineers, Belgaum. He started working under Mr. V B Inamdar (Present Partner). It was here that he learnt i.e., from Purchases, Production, Inspection and Despatch, Etc for a period of one and half yeaRs. In M/s Pusalkar Engineers he came in contact with M/s Kirloskar Electric Co. Ltd. Bangalore & Hubli. Having gained 1
  • 11. Activity Based Costing the experience and he left M/s Pusalkar Engineers, Belgaum and was idle for 2 to 3 months. Meanwhile Shri V B Inamdar also left M/s Pusalkar Engineers and they both decided to start their own business. In the year 1977, they both started their own business in the name of M/s Akash Industries. They had neither place nor financial support. With a mere Rs. 3000/- they went on to purchase a wielding machine and started in their own garage at Angol ‘C’ scheme. Initially it was only fabrication work that they used to carry out. But with this type of work it was impossible for both of them to meet their ends. By this time 6 months had passed. They really had a tough time and a tougher time to Mr. Inamdar who was married and had 3 childrens. Meanwhile, they felt that they should better join any service. Even to approach somebody for work, they didn’t had the requisite finance. With the help of Mr. Inamdar’s, brother in law, who was working in West Coast Paper Mills Limited Dandeli, they could get an entry. Initially, they gave them maintenance jobs, which they used to get the things from their fellow industrialists and supply the same. Months passed by and they felt that how they can ever survive with this little earning. It was even difficult for them to go by bus and many a times they used to travel by truck to Dandeli, finish their work and again return back to Belgaum, by some means with hardly a few chips in their pockets. This continued for a year and half. It was at this time that Shri A G Tembe, of M/s Ohm Electricals, gave them shelter in his shed at Industrial estate. Here they prolonged their business for 2 years supplying maintenance jobs. Doing fabrication work and even if necessary they used to carry the wielding machine to customers place and carry out the work. Their major problem was finance and how to expand their engineering activities was a big question mark for them. But since they had no shed or own machinery they could not approach the engineering companies. However, in the year 1979, they got an Industrial Plot of 10 Guntas from KSSIDC LTD, through the help of Late Shri N A Hanamannavar, the then Chairman of the City Improvement Board. They approached State Bank Of India for financial assistance and it was at this juncture that they really helped them to construct their own shed and purchase of machinery. Their Working capital of Rs. 10,000 was also sanctioned. With the vast experience of Mr. V B Inamdar, I.e of more than 15 years and his previous contacts. They approached M/s KIRLOSKAR ELECTRIC COMPANY LIMITED. BANGALORE and M/s LARSEN & TOUBRO LTD. BANGALORE. Since, their line of activity was only Sheet 1
  • 12. Activity Based Costing Metal Components, they could get a good amount of workload. They proved themselves by quality and delivery. More and more work started coming in and somehow they had to meet their urgency with having only few machines. Having got confidence, they expanded their own shed and added few more machines of a higher capacity. They approached M/s CROMPTON GREAVES LTD. AHMEDNAGAR, AUTOMOBILE CORPORATION OF GOA LTD. KIRLOSKAR ELECTRIC CO. HBL PEENYA & PUNE. In a span of two to three years their business increased multifold. Capacity reached a saturated point and they were not in position to meet their high demands and they had to add some higher capacity of Hydraulic Presses converting the same into double acting and triple acting. This increased their supply position. In the year 1984, they started another partnership concern in the name of M/S KARNATAKA METAL PRESSING just near to their existing concern taking Mr. P A Bagewadi and Mr. S K Yatgeri as additional partners. Here their basic activity was only to manufacture Pole bricks of different capacities for alternators. At present their turnover stands at Rs 45 Lakh per month. In the year 1988, they got an order from M/s AMMUNITION FACTORY, PUNE for supplying of Aluminum Cartridge cases purely an import substitute. For this special purpose machines were acquired with the most accurate toolings and precious inspection equipments to meet their highest accuracy and quality. These cartridge cases are used to make Anti Riot Rubber Bullets, which are used by the Police Department during Anti Riots. This was their biggest achievement that they had in their last 29 years. AKASH INDUSTRIES major activities are manufacturing of Sheet Metal Pressed Components for Alternator, Motor, Automobile Parts and items required by customers to their required specifications. In the words of Mr. S T Macha “This is all due to hard and sincere work and the backing of our fellow industrialists who have supported us in all our difficult times”. “Our aim is to do sincere and hard work giving more attention to quality and delivery. This is what every one wants in this world of competition”. 1
  • 14. Activity Based Costing COMPANY PROFILE Name of the Organization : Akash Industries Type of Industry : Manufacturing Industry. Address : Akash Industries M-15, Industrial Estate, Udyambag, Belgaum – 590 008 Partners : S.T Macha V.B Inamdar M.V Inamdar A.S Macha Established : 1977 Size and nature of the company : Sales 1
  • 15. Activity Based Costing FY08-09 : Rs48,333,876.81 Employees : 50 QUALITY POLICY AT AKASH INDUSTRIES 1. To meet customers requirement and strive to exceed customer expectations. 2. Manage all activities and related resources as a process. 3. Create and maintain an environment in which personnel are fully involved in achieving organization objectives so as to ensure continual improvement and growth. 4. Take decisions and implement necessary actions based upon analysis of data and information. 5. Involve all our suppliers in quality improvement process as to ensure mutually beneficial and long time relationship. 1
  • 16. Activity Based Costing ORGANIZATION CHART 1 Shop Incharge Chief Accountant Incharge Excise Incharge Sales Tax Managing partner 1 Managing partner 2 In charge QA/QC Cashier Management Representative Deputy Management Representative Plant Supervisor 1
  • 17. Activity Based Costing PRODUCTS MANUFACTURED BY AKASH INDUSTRIES Components are manufactured as per the customer requirements. They are catering at present the industries like electrical, elevators & home appliances, specialization being deep drawn components using C.R. & H.R. as the raw material, with thickness of material varying from 1 mm CRCA to 8mm H.R. 1 Plant supervisor 2 In charge stores Workers
  • 18. Activity Based Costing 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  Kirloskar Electric co. Hubli  Mallik Engineering , Bangalore  Telco Construction Equipment, Dharwad 1
  • 20. Activity Based Costing RESEARCH METHODOLOGY The Study: The present study is an attempt to understand and ascertain the costing method followed in Akash Industries 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 Akash Industries. • To identify activities involved in manufacturing of UC Range series 4 end cover. • To identify cost of the activities involved in manufacturing the product UC Range series 4 end cover. • To allocate the cost for the activities. • To find the cost per unit of the product UC Range series 4 end cover. • To compare existing costing method followed by Akash Industries with Activity 1
  • 21. Activity Based Costing 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 AKASH INDUSTRIES. It involves finding out the cost per unit of the product UC Range series 4 end cover by following Activity based Costing. 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 Akash Industries (Mr.Sunil Kundap) . ¬ 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 year’s balance sheet of Akash Industries. 1
  • 22. Activity Based Costing ¬ Books on cost accounting were referred. ¬ Company website Limitations of the study: • The study is limited to AKASH INDUSTRIES only. • In order to maintain confidentiality some information could not be disclosed by Akash Industries. CONCEPTUAL FRAMEWORK 1
  • 23. Activity Based Costing ACTIVITY BASED COSTING 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. The goal 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 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 1
  • 24. Activity Based Costing 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. What's what 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 1
  • 25. Activity Based Costing 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. 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. 1
  • 26. Activity Based Costing 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 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 1
  • 27. Activity Based Costing VIEW 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. 1 COST DRIVERS ACTIVITIES PERFORMANCE MEASURES RESOURCES OBJECTS OF WORK ACTIVITY DRIVERS RESOURCE DRIVERS
  • 28. Activity Based Costing ABC categorizes the activities into: Unit level activities: θ Performed each time a unit is produced. θ Consumed in direct proportion to the number of units produced. θ E.g. Direct materials, Energy costs, direct labour, etc. Batch related activities: θ Performed each time a batch of goods is produced. θ Consumed in direct proportion the number of batches produced. θ Fixed for all units within a batch. θ E.g. set up resources, purchasing resources. Product sustaining activities: θ Performed to support and sustain different products/services on the product life cycle. θ Consumption varies with the variety of products/services and the stage of the Product Life Cycle the products/services are in. θ E.g. designing the product. Facility sustaining activities: 1
  • 29. Activity Based Costing θ Performed for supporting the happening of the above three types of activities and providing the platform/infrastructure. θ These are generally fixed for a certain scale/scope of operations over a period of time. θ E.g. Administration, plant maintenance, accounting, etc. θ These costs are deducted lump sum from operating margins of all product lines. ABC establishes inputs and outputs to and from each activity, Inputs to one activity may be outputs from another and there could also be interactive relationships among activities. Hierarchy of Activities and Activity based profitability analysis Sales Revenue 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) = batch – level 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. 1
  • 30. Activity Based Costing 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 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. 1
  • 31. Activity Based Costing 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. 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. 1
  • 32. Activity Based Costing ACTIVITY BASED COSTING ADVANTAGES • More accurate costing of products/services, customers, distribution channels. • Better understanding overheads. • Easier to understand for everyone. • Utilizes unit cost rather 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. 1
  • 33. Activity Based Costing 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. 1
  • 35. Activity Based Costing DETAILS OF THE PRODUCT Product name: UC Range series 4 end cover Raw Material Requirements for the product 1) Metal sheet of length 1250*2500*1.2mm 2) Weight of the sheet is 30kg 3) 21 Covers can be prepared from one metal sheet. 4) Sheets required to prepare 1000 units is 48sheets. 5) Cost of sheet metal 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 = 78.1– 6.5 = Rs71.6 1
  • 36. Activity Based Costing COSTING FOLLOWED BY THE COMPANY Product: UC Range series 4 end cover Number of units produced = 300000 Covers 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 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 1
  • 37. Activity Based Costing Cost Of Sales 4,30,52,781 143.50 PROFIT 52,81,095 17.6 SALES 4,83,33,876 161.1 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 metal Delivered from R.C Nagar Belgaum to Akash industries Belgaum = Rs.600.00 Therefore charges per unit = Rs600/5000kgs = Rs0.12/kg Cost of per cover =1.42kg x Rs0.12 =Rs0.1704/cover b) Loading and unloading Charges = Rs300.00/ton 5 Ton x Rs300 = Rs1500.00 Therefore charges for per unit = Rs1500/5000kgs = Rs0.20/kg Cost per cover =1.42 x Rs0.20 =Rs0.284/cover 1 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
  • 38. Activity Based Costing c) Storage charges = space required 10 x 5ft Rent 20000/month Building area = 10000sq ft Storage Cost =50sq ft x Rs2.00 =Rs100.00/- p.m Storage cost per day =Rs100/26Days =Rs3.84/day Storage cost per Cover =Rs3.84/1000Covers =Rs0.00384/cover d) Material cost = 5000kgs x Rs 71.28 (exclusive of transport and loading and unloading charges) = Rs3,56,400 =5000kgs/1.42wt per kg =3521 Covers =Rs3,56,400/3521 Covers =Rs101.22 – scrap =Rs101.22– Rs6.5 =Rs94.72/cover Total cost incurred for purchase of raw material Activity Sub Activity Cost Purchase Raw material transport Rs0.1704/cover Loading and unloading Rs0.284/cover Storage Rs0.00384/cover Material cost Rs 94.72/cover Total Rs95.17 2) Manufacturing cost 1
  • 39. Activity Based Costing 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 1 Activity Sub Activity Activity Driver Manufacturing Shearing Combination of man and machine hour Circle cutting Combination of man and machine hour Deep drawing Combination of man and machine hour Trimming Combination of man and machine hour Piercing Combination of man and machine hour Process labor Wages per day Hours Number of Covers per 8 hrs Cost of Machine Hp per machine Space occupie d by the machine Cost per sq ft Shearing 3 300/wor ker 8 1000 500000 5 100 sq ft Rs2 Circle cutting 1 150 8 800 100000 0.5 50 sq ft Rs 2 Deep drawing 2 150 &135 8 800 800000 7 100sq ft Rs 2 Trimming 1 150 8 500 300000 3 80sq ft Rs 2 Piercing 1 150 8 900 400000 3 50 sq ft Rs 2
  • 40. Activity Based Costing =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 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 1
  • 41. Activity Based Costing =0.021/Cover Total Cost of shearing activity Activity Sub Activity Cost Shearing Man cover rate Rs0.9/cover Machine cover rate Rs0.17/cover Space occupied by the machine Rs0.00769/cover electricity Rs0.1336/cover Fuel oil & lubricants Rs0.021/cover Total Rs 1.232/cover 2. Circle cutting a) Man cover rate =wages/number of Covers = Rs150/800Covers =Rs0.1875/Cover b) Machine cover rate =Rs100000 x 10% depreciation =Rs10000 p.a =Rs 10000/300days =Rs33.33/per day =Rs33.33/800Covers =Rs0.0416/Cover c) Space occupied by = 50Sq ft x Rs 2 per sq ft the machine = Rs100 p.m = Rs100/26days 1
  • 42. Activity Based Costing =Rs3.84/day =Rs3.84/800Covers =Rs 0.0048/Cover e) calculation of electricity Monthly electricity bill = Rs31,266 Monthly power consumption = 45hp Therefore, Rs31,266/45hp = Rs694.8 per hp/ month Power Consumption = 0.5hp For 0.5hp = Rs694.8 x 0.5hp = Rs347.4 Electricity bill per month = Rs347.4 = Rs347.4/26days =13.36/day =13.36/800Covers =Rs0.0167/Cover Fuel oil & lubricants = Rs1,58,028 p.a = Rs 158028/ 300days = Rs 526.76/day = Rs 526.76/25machines =Rs21.07/machine =21.07/800Covers =0.026/Cover Total Cost of circle cutting activity 1
  • 43. Activity Based Costing Activity Sub Activity Cost Circle cutting Man cover rate Rs0.1875/cover Machine cover rate Rs0.0416/cover Space occupied by the machine Rs0.0048/cover electricity Rs0.0167/cover Fuel oil & lubricants Rs0.026/cover Total Rs0.2766/cover 3. Deep drawing a) Man hour rate =wages/number of Covers = Rs285/800Covers =Rs0.3562/Cover b) Machine hour rate =Cost of machine x Depreciation =Rs800000 x 10% depreciation =Rs80000 p.a = Rs80000/300days =Rs266.67/per day =Rs266.67/800Covers =Rs0.333/Cover c) Space occupied by = 100Sq ft x Rs 2 per sq ft the machine = Rs200 p.m = Rs200/26days =Rs7.69/day =Rs7.69/800Covers =Rs0.0096/Cover 1
  • 44. Activity Based Costing d) calculation of electricity Monthly electricity bill = Rs31,266 Monthly power consumption = 45hp Therefore, Rs31,266/45hp = Rs694.8 per hp/ month Power Consumption = 7hp For 7hp = Rs694.8 x 7hp = Rs4863.6 Electricity bill per month = Rs4863.6 = Rs4863.6/26days =187.06/day =187.06/800Covers =Rs0.233/Cover Fuel oil & lubricants = Rs1,58,028 p.a = Rs 158028/ 300days = Rs 526.76/day = Rs 526.76/25machines =Rs21.07/machine =21.07/800Covers =0.026/Cover Total Cost of deep drawing activity Activity Sub Activity Cost Deep Drawing Man cover rate Rs0.3562/cover Machine cover rate Rs0.333/cover Space occupied by the Rs0.0096/cover 1
  • 45. Activity Based Costing machine electricity Rs0.233/cover Fuel oil & lubricants Rs0.026/cover Total Rs 0.9578/cover 4. Trimming a) Man hour rate =Wages/number of Covers = Rs150/500Covers =Rs0.3/Cover b) Machine hour rate =Cost of machine x depreciation =Rs300000 x 10% depreciation =Rs30000 p.a = Rs30000/300days =Rs100/per day =Rs100/500Covers =Rs0.2/Cover c) Space occupied by = 80Sq ft x Rs 2 per sq ft the machine = Rs160 p.m = Rs160/26days =Rs6.15/day =Rs6.15/500Covers =Rs 0.012/Cover d) calculation of electricity Monthly electricity bill = Rs31,266 Monthly power consumption = 45hp Therefore, 1
  • 46. Activity Based Costing Rs31,266/45hp = Rs694.8 per hp/ month Power Consumption = 3hp For 3hp = Rs694.8 x 3hp = Rs2084.4 Electricity bill per month = Rs2084.4 = Rs2084.4/26days =80.16/day =80.16/500Covers =Rs0.16/Cover Fuel oil & lubricants = Rs1,58,028 p.a = Rs 158028/ 300days = Rs 526.76/day = Rs 526.76/25machines =Rs21.07/machine =21.07/500Covers =0.042/Cover Total Cost of trimming activity Activity Sub Activity Cost Trimming Man cover rate Rs0.3/cover Machine cover rate Rs0.125/cover Space occupied by the machine Rs0.012/cover electricity Rs0.16/cover Fuel oil & lubricants Rs0.042/cover Total Rs 0.639/cover 1
  • 47. Activity Based Costing 5. Piercing a) Man hour rate =Rs 150/900Covers =0.166/Cover b) Machine hour rate =400000 x 10% depreciation =40000 p.a = 40000/300days =133.33/per day =133.33/900Covers =0.148/Cover c) Space occupied by = 50Sq ft x Rs 2 per sq ft the machine = Rs100 p.m = Rs100/26days =Rs3.84/day =Rs3.84/900Covers =Rs 0.0042/Cover d) calculation of electricity Monthly electricity bill = Rs31,266 Monthly power consumption = 45hp Therefore, Rs31,266/45hp = Rs694.8 per hp/ month 1
  • 48. Activity Based Costing Power Consumption = 3hp For 3hp = Rs694.8 x 3hp = Rs2084.4 Electricity bill per month = Rs2084.4 = Rs2084.4/26days =80.16/day =80.16/900Covers =Rs0.089/Cover Fuel oil & lubricants = Rs1,58,028 p.a = Rs 158028/ 300days = Rs 526.76/day = Rs 526.76/25machines =Rs21.07/machine =21.07/900Covers =0.023/Cover Total Cost of piercing activity Activity Sub Activity Cost Piercing Man cover rate Rs0.166/cover Machine cover rate Rs0.148/cover Space occupied by the machine Rs0.042/cover electricity Rs0.089/cover Fuel oil & lubricants Rs0.023/cover Total Rs0.468/cover 1
  • 49. Activity Based Costing Total Cost of the processes 3) Inspection Inspection rate 10% of number of units produced per day 1000Covers x 10% = 100Covers to be inspected 1 Activity Sub Activity Cost Manufacturing Shearing Rs1.232/cover Circle cutting Rs0.2766/cover Deep drawing Rs 0.9578/cover Trimming Rs 0.639/cover Piercing Rs0.468/cover Total Rs3.5734/cover
  • 50. Activity Based Costing 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 3) Calibration charges per year = Rs900 Per month charges = Rs900/12months = Rs75/month Per day charges = Rs75/26days 1
  • 51. Activity Based Costing = Rs3/day Per hour charges = Rs3/8hr =Rs0.375/hr Total of inspection activity Activity Sub Activity Cost Inspection Salary of the inspector Rs38.46/hr instruments required to inspect Rs3.4/hr Calibration Rs0.375/hr Total Rs42.23/hr Cost of Per Cover Rs 0.0422/cover 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 1
  • 52. Activity Based Costing =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/ 26Covers = Rs8.6/Cover 2) Labour cost People required for painting = 2 Wages per day = Rs 320 Covers painted in one day = 200 Covers Cost per cover = Rs320/200covers =Rs1.6/cover 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 1
  • 53. Activity Based Costing Cost of per covers =Rs 192.3/200Covers =Rs0.961/Cover 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 =Rs53/200Covers =Rs0.265/Cover 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 =Rs138.46/200Covers 1
  • 54. Activity Based Costing = Rs0.692/Cover Area of the Cover = 1.72sq ft Cost of per cover = Rs12.11 x 1.72sq ft = Rs20.82/cover Total cost of painting activity Activity Sub Activity Cost 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 Total Rs12.11/sq ft Cost of Per Cover Rs20.82/cover 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/Cover Cost of paper = Re1.00/Cover Number of Covers packed per box = 200 covers Rs3000 + (Re1.50 x 200) + (Re1.00 x 200) = Rs3500 2) labour People required = 3 5 boxes packed per day Wages = Rs200 + Rs150 + Rs150 1
  • 55. Activity Based Costing = Rs500/day Wages per box = Rs500/5boxes = Rs100/box Total =Rs 3500 + Rs100 = Rs 3600 Per Cover = Rs3600/200Cover =Rs18/Cover Total of dispatching Activity Activity Sub Activity Cost Despatching Packing charges Rs3500 labour Rs100 Total Cost Per Cover Rs3600/box Rs18/Cover COST PER UNIT OF THE PRODUCT 1 ACTIVITIES Amount in Rs COST/COVER 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
  • 57. Activity Based Costing FINDINGS 1. Akash Industries are specialized in deep drawn components that cater the electrical, elevator, home appliances automobile industry and the defense. 2. Akash Industries follows traditional method of costing. 3. The product UC Range series 4 end cover 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 Akash Industries they 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. Akash Industries relates 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. 1
  • 59. Activity Based Costing SUGGESTIONS 1. Akash Industries 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. Akash Industries can 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. Akash Industries should 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 1
  • 60. Activity Based Costing 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. CONCLUSION 1
  • 61. Activity Based Costing CONCLUSION ABC utilizes the activity concept and by using the activities, ABC can successfully link the product costs to production knowledge. How a product is produced, how much time is needed to perform an activity and finally how much money is absorbed by performing this task are answered by the help of ABC studies. This method is a dynamic tool for continuous improvement. With ABC to its benefit, any enterprise will have a built in competitive cost advantage and can continuously add value to both its stakeholders and customers. Therefore, Activity-Based Costing measures the costs and profits of an organization based on the activities performed within that organization. By focusing on processes that contribute to revenues and business operations, ABC can accurately determine how each process relates back to specific products, customers, or services. This can make a big difference after considering warehouse, sales, customer service, administration and other costs that are often applied at a standard rate, if at all. With ABC you can drill into profitability and performance by almost any factor you can think of. 1
  • 63. Activity Based Costing BIBLOGRAPHY ¬ Books : 1) COST ACCOUNTING for BUSINESS MANAGERS by Asish K Bhatacharyya. 2) COST ACCOUNTING by I M Pandey 1