Activity Based Costing (PowerPoint PPT Slide Deck)

DESCRIPTION

This product (Activity Based Costing) is a 29-slide PPT PowerPoint presentation slide deck (PPT), which you can download immediately upon purchase.

Activity Based Costing (ABC) analysis is a methodology for assigning costs to those activities that truly drive these costs. It is tangibly more accurate than traditional costing methods. Traditional costing methods overlook product-specific R&D, advertising, distribution/channel, and administration costs. As a result, there is no way to capture different behaviors tied to specific customers or products.

ABC costing analysis is a valuable costing technique to know for a number of key reasons:

•  ABC allows you to develop a picture of the true profitability of product lines, customer segments, distribution channels, geographies, and other market segments.
•  ABC aids in a number of strategic decisions, from determining target markets to selecting the optimal product mix to making informed pricing decisions.

Specifically, Activity Based Costing analysis leads to a more accurate assignment of costs to cost objects through a process of:

•  Matching the logical flow of costs through the cost system to the economics of true cost flows.
•  Mapping costs from "resources" (e.g. wages paid, supplies purchased) to activities performed (e.g. units manufactured) to cost objects (e.g. products, customers, distribution channels) that drive those costs.

ABC is an invaluable tool for making strategic decisions, as it allows you to develop a picture of true profitability of product lines, customer segments, geographies, distribution channels, and other markets. This document explains a 7-phase approach to Activity Based Costing:

1. Develop Cost Objects
2. Group Cost Objects
3. Develop Process Maps
4. Identify Cost Elements
5. Map General Ledger Costs
6. Allocate Costs
7. Verify Economic Logic

In this Activity Based Costing PowerPoint presentation, each phase is discussed in detail and includes examples.

Additional topics discussed in this Activity Based Costing PPT include ABC vs. traditional costing methods, advantages and drawbacks of ABC, spreadsheet modeling, product profitability-driven customer profitability, among others. With this in-depth presentation, you can gain the understanding of how to develop an Activity Based Costing formula and Activity Based Costing System for your organization.

A full Activity Based Costing example is also included, which breaks down the financials overview, key activities, activity costs, activity drivers, product profitability analysis, and activity based customer profitability.

Gain insights into how ABC can be leveraged for cost object-level decisions, such as dropping unprofitable product lines. Understand the role of resource cost pools and resource drivers in accurately attributing costs to activities.

Source: Best Practices in Cost Optimization, Costing, Cost Analysis, Management Accounting PowerPoint Slides: Activity Based Costing PowerPoint (PPT) Presentation Slide Deck, LearnPPT Consulting

PPT SLIDE DEEP DIVES

Cost Allocation: ABC vs. Traditional Methods

This PPT slide presents a comparative analysis of Activity Based Costing (ABC) and Traditional Costing Methods, emphasizing how costs are allocated in each approach. On the left, the ABC framework is depicted, illustrating a structured flow where costs are mapped logically to specific cost objects. It starts with the General Ledger, which is divided into various Resource Cost Pools. These pools feed into Activity Cost Pools, which then allocate costs to Products and Customers. This method highlights a more precise allocation of costs based on actual activities, allowing for better insight into resource usage and profitability.

On the right side, Traditional Costing Methods are represented. Here, the General Ledger also serves as the starting point,, but the allocation process is less nuanced. Costs are distributed through volume-based indirect allocations, which can lead to less accurate cost assignments. This method typically aggregates costs without considering the specific activities that drive those costs, potentially masking underlying inefficiencies.

The visual representation underscores the fundamental differences between the 2 costing methodologies. ABC provides a more detailed and activity-focused view, which can lead to improved decision-making and resource management. In contrast, Traditional methods may simplify the process, but risk oversimplifying cost assignments, which could mislead financial assessments.

For organizations looking to refine their costing strategies, this slide serves as a critical resource. It illustrates the advantages of adopting ABC for a more granular understanding of costs, ultimately aiding in more informed strategic decisions. Understanding these distinctions can be pivotal for executives aiming to enhance operational efficiency and financial performance.

Structured 7-Phase Approach to Activity Based Costing

This PPT slide outlines a structured 7-phase process for implementing Activity Based Costing (ABC). Each phase is clearly delineated, providing a step-by-step framework for organizations looking to adopt this costing method.

The first phase, "Develop Cost Objects," emphasizes identifying the primary cost objects under analysis, such as products or customers. This foundational step is crucial as it sets the stage for the entire costing process. Following this, the second phase, "Group Cost Objects," involves categorizing these cost objects into logical groupings, which may include product lines or customer segments. This grouping aids in simplifying the analysis and enhances clarity.

The third phase, "Develop Process Maps," focuses on creating high-level flow maps of the processes involved. This visual representation helps in understanding the workflow and identifying areas where costs may be incurred. The fourth phase, "Identify Cost Elements," requires a review of financial statements to pinpoint the major cost elements, ensuring that all relevant costs are captured.

In the fifth phase, "Map GL Costs," the emphasis shifts to mapping overhead and general ledger costs to specific activities. This mapping is essential for accurately attributing costs to the right areas. The sixth phase, "Allocate Costs," involves the allocation of direct and activity costs to the identified cost objects, which is vital for assessing profitability.

Finally, the seventh phase, "Verify Economic Logic," ensures that the economic rationale behind the ABC analysis is sound. This verification step is critical for validating the overall approach and ensuring that the insights derived from the analysis are actionable and reliable. Overall, this slide serves as a comprehensive guide for organizations aiming to implement ABC effectively.

Cost Driver Identification and Unit Cost Calculation

This PPT slide presents a structured approach to identifying cost drivers and calculating unit costs associated with various activities within a business framework. It categorizes total costs per activity into 5 key areas: Order Taking, Manufacturing, Packaging, Delivery, and Customs. Each category lists the total cost, which varies significantly, indicating the complexity and resource allocation for each activity.

For Order Taking, the total cost is $620, while Manufacturing incurs the highest cost at $830. The breakdown of costs for specific items, Gadgets and Gizmos, is also provided. For instance, the cost per Gadget in Manufacturing is $730, while for Gizmos, it is $100. This detailed breakdown allows for a clearer understanding of where resources are allocated and the financial implications of each product type.

The slide emphasizes the importance of identifying appropriate cost drivers, which are the factors that influence costs in each activity. For example, the number of calls is relevant for Order Taking, while the number of gadgets produced is crucial for Manufacturing. The slide also outlines the need to determine values for each driver, such as 200 calls for Order Taking and 200 Gadgets for Manufacturing.

Finally, the unit cost for each activity is calculated based on the identified drivers. For instance, the unit cost for Order Taking is $3.10, while Manufacturing is $3.65 per Gadget. This systematic approach not only aids in understanding cost structures, but also supports informed decision-making regarding pricing and resource allocation.

Enhancing Cost Accuracy: ABC vs. Traditional Methods

This PPT slide presents a comparative analysis of Activity Based Costing (ABC) and traditional costing methods, emphasizing the advantages of ABC in providing more precise cost allocations. ABC is designed to accurately assign both direct and indirect costs to specific cost objects, which may include products, customers, and various market segments. This method aims to trace direct costs effectively to their respective cost objects while also addressing the misallocation of overhead costs by directing them appropriately. The slide highlights that ABC is particularly beneficial when overhead costs constitute a significant portion of total costs.

On the other hand, traditional costing methods are depicted as yielding less reliable cost estimates. Direct costs are traced back to the products that incur them,, but indirect costs are allocated across all products based on a generalized cost driver, such as labor hours or raw material weight. This approach can lead to inaccuracies, as it overlooks the unique costs associated with specific products, including research and development, advertising, and distribution expenses. Consequently, traditional methods fail to capture the distinct cost behaviors linked to individual customers or products.

The insights from this comparison suggest that organizations seeking to enhance their cost management practices should consider implementing ABC. By doing so, they can achieve a more nuanced understanding of their cost structures, ultimately leading to better decision-making and resource allocation. This slide serves as a valuable resource for executives contemplating the adoption of more sophisticated costing methodologies.

Identifying Primary Cost Objects in ABC Analysis

This PPT slide outlines the initial phase of Activity-Based Costing (ABC) analysis, focusing on identifying primary cost objects. It emphasizes that the first step in this analytical process is to determine what these cost objects are. A cost object is defined as any item to which activity costs are assigned and accumulated. The slide categorizes these objects into 5 main areas: products, customers, markets, geographies, and distribution channels.

Under each category, specific examples are provided. For products, examples include specific product lines or categories. The customer category suggests various methods for defining customer groups, which indicates the need for segmentation in analysis. Markets are similarly defined, hinting at the importance of understanding different market dynamics. Geographies highlight the need to consider various regions, such as the US and China, while distribution channels encompass both direct and indirect methods, as well as physical and online avenues.

The slide also notes that cost objects represent logical separations in business costs, which is crucial for accurate financial analysis. It stresses the importance of ensuring that the selected cost objects are MECE—mutually exclusive and collectively exhaustive. This principle is vital for avoiding overlaps and gaps in the analysis, ensuring that all relevant costs are accounted for without redundancy. Overall, this phase sets the groundwork for a structured approach to understanding and managing costs effectively.

Income Statement Modeling for Cost Object Analysis

This PPT slide outlines a structured approach to building an income statement for various cost objects using a spreadsheet model. It emphasizes the importance of clearly defining the rows and columns within the model. The rows are designated for revenues, costs, and profitability metrics, while the columns represent distinct cost objects, which may include products, customers, markets, or geographical segments.

The revenue section captures the income generated from each cost object, while the costs are broken down into specific categories, such as salaries and wages, fringe benefits, and other relevant expenses. This level of detail allows for a granular understanding of where expenses are incurred. Profit is calculated by subtracting total costs from total revenues, providing insight into the financial performance of each cost object.

The slide also highlights the necessity of determining the individual profitability of each cost object. This is crucial for making informed strategic decisions regarding resource allocation and operational adjustments. The mention of software tools suggests that there are technological solutions available to facilitate this process, enhancing accuracy and efficiency in cost allocation.

Overall, the slide serves as a practical guide for executives looking to implement a systematic approach to financial analysis. It underscores the significance of detailed financial modeling in understanding the profitability of various segments within an organization. This clarity can drive better decision-making and strategic planning, ultimately leading to improved financial outcomes.

Visual Framework for Activity-Based Costing Implementation

This PPT slide outlines the fifth phase of a framework focused on visual representation within an activity-based costing model. It begins with a depiction of the General Ledger, which organizes cost centers into 4 distinct Resource Cost Pools. This segmentation is crucial as it allows for a more manageable analysis of costs, emphasizing that a breakdown into 4 to 7 pools is typically adequate. The rationale behind this grouping is to align resources with the company’s value chain or supply chain, facilitating a clearer understanding of resource allocation.

Next, the slide introduces the concept of Resource Drivers, which are essential for linking costs to activities. These drivers can manifest in various forms, such as headcount or product quantities. Identifying the primary resource drivers is vital, and it suggests engaging with process or activity owners to pinpoint these key elements.

The Activity Cost Pools are also highlighted, indicating that each activity must have a corresponding cost pool, as previously defined in an earlier phase. This structure ensures that costs are accurately attributed to the right activities, enhancing the overall financial analysis.

The visual flow from Resource Cost Pools to Activity Cost Pools and finally to Products and Customers illustrates the interconnectedness of costs and activities. This representation aids in understanding how resource allocation impacts overall business performance. For executives considering this framework, the slide underscores the importance of a systematic approach to cost management, which can lead to more informed decision-making and strategic planning.