Free Essay

Activity Based Costing Case

In: Business and Management

Submitted By abshawly
Words 1207
Pages 5
Managerial & Cost
Accounting
ACCT610

Activity-Based Management
Made Possible By

Activity-Based Costing
Supervised by Professor Majboor Alnamri

Prepared by:
EMBA Student
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KAAU - EMBA

Overview







Over/Under Costing
Methods of Allocating Indirect Cost
Refining a cost system
Costs/Benefits of ABC
ABC in service & retail
Example from an Organization

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Over Costing & Under Costing

Over Costing—a product consumes a low level of resources but is allocated high costs per unit.
Under Costing—a product consumes a high level of resources but is allocated low costs per unit.

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Activity-Based Costing

Identifies activities required to produce the product or service Determines the cost of the activities

Allocates costs to the cost object based on the object’s consumption of activities
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Methods of Allocating Indirect Cost

Cause-and-effect
Using this criterion, managers identify the variable or variables that cause resources to be consumed

Benefits-received
Using this criterion, managers identify the beneficiaries of the outputs of the cost object
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Methods of Allocating Indirect Cost

Fairness or equity
This criterion is often cited on government contracts when cost allocations are the basis for establishing a price satisfactory to the government and its suppliers.

Ability to bear
This criterion advocates allocating costs in proportion to the cost object’s ability to bear them.
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Refining a Costing System

More Direct-cost tracing

Indirect-cost pools

(More homogeneous) Better cost-allocation bases

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Activity-Based Costing System
Activity
Indirect Cost
Pool

Design

Setup

Shipping

Cost
Allocation
Base

No. of
Employees

No. of
Setup
Hours

No. of
Shipments

Product
A

Product
B

Product
C

Product
Cost
Objects

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Activity-Based Management
A method of management that uses Activity-Based
Costing information as an integral part in critical decision-making situations including
Pricing and product mix decisions
Cost reduction and process improvement decisions
Design decisions
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Benefits of ABC Systems
Significant amounts of indirect costs are allocated using only one or two cost pools.
All or most costs are identified as output unit-level costs. Products make diverse demands on resources because of differences in volume, process steps, batch size or complexity.
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Benefits of ABC Systems
Products that a company is well-suited to make and sell show small profits while products for which a company is less suited show large profits.
Complex products appear to be very profitable and simple products appear to be losing money.

Operations staff have significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services.
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Limitations of ABC Systems
The main limitations of ABC are the measurements necessary to implement the system.
ABC systems require management to estimate costs of activity pools and to identify and measure cost drivers for these pools.
Activity-cost rates also need to be updated regularly.
Very detailed ABC systems are costly to operate and difficult to understand.
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ABC In Service & Merchandising
Companies
The general approach to ABC in the service and merchandising areas is very similar to the approach in manufacturing. Costs are divided into homogeneous cost pools and classified as output unit-level, batch-level, product- or service-sustaining and facility-sustaining costs.
Costs are allocated to products or customers using activity drivers or cost-allocation bases that have a cause-andeffect relationship with the cost in the cost pool.
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ABC In Service & Merchandising
Companies

ABC implementation is widespread in a variety of applications outside manufacturing, including:
• Health Care
• Banking
• Telecommunications
• Retailing
• Transportation

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ABC In Service

King Faisal Specialty Hospital & Research Center
Jeddah, Saudi Arabia
King Faisal Specialty Hospital & Research Center (KFSH&RC) is ranked amongst top 50 hospitals in the world placed at 28th position and 1st in Kingdom of Saudi
Arabia. The hospital is the national referral center for oncology, organ transplantations, cardiac surgery, genetic diseases, and more. It operates approximately 1100+ beds. Oncology Centre of the KFSH&RC provides comprehensive cancer treatment, education and training and clinical research.

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ABC In Service
Business Problem
• Data required for costing was maintained on an excel based system with data from many supporting systems- Oracle GL, Venus and Data
Warehouse. It was time consuming and the risk of errors was high.
• KFSH recognized that with over 220 million chargeable services each year, a system was required that could provide robust data for decision making purposes whilst being easily maintained and provide integration with existing data source systems.
• Automating the model was important because it had to be used as the basis for pricing their services and also to accurately understand the profit generated by each service center.
• A solution was required which could be expanded upon in the future for new services and build upon the inherent limitations an excel system has.
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ABC In Service
Business Problem
• Unallocated overhead costs.
• Limited cost driver solutions.
• Unable to benchmark costs of CDM service items in absence of appropriate cost model.
• No online system was available that gives analysis of costs as and when required by the management.
• Restricted updates to the cost model.

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ABC In Service
Levels of Costing Information
Required

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ABC In Service
Source Systems in KFSH
KFSH uses various systems to keep record of different types of data. To make cost model online, it is necessary to bring information from all these systems at one place. Once all the required information comes in
Hyperion, HPCM performs calculation based on the design and gives cost per CDM service item.
• Oracle GL is the source system of the cost data for each cost center.
These cost centers are loaded in Hyperion with cost figures.
• Billing System Venus is the billing system for KFSH&RC. Data related to CDM service items, RVUs, volume of each CDM service items is available in Venus.
• Data Warehouse All information from the HIS and various other clinical applications are accumulated in the Data Warehouse and hence the DW becomes the third and an important source of information for all operational drivers
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ABC In Service
Source Systems in KFSH

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ABC In Service
The Solution Model

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ABC In Service
The Solution
• Integration of source data systems to Hyperion through interface tables..
• Defined the mapping between CDM service items with Cost Center in Hyperion.
• Defined assignment of drivers to appropriate dimensions in Hyperion.
• Eliminated illogical cost allocation, brought it in the normal flow of cost allocation.
• Allocated support costs among direct cost centers on the basis of their direct costs.
• Logical Grouping and Categorization of cost centers into source system itself so as to make the end to end process automated.
• Grouped cost centers into Main Cost Centers so that entire costs can be allocated to
CDM service items on the basis of their RVUs (Relative Value Units) and volume.
• Evosys managed to provide an automated solution to manage their costing needs.
• Studied model & made certain changes to make it robust and understandable.
• We also provided them with reporting tools to perform analysis of the cost flow from source to destination.
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Thank You

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...Journal of Business & Industrial Marketing Emerald Article: Activity-based costing: a powerful tool for pricing John C. Lere Article information: To cite this document: John C. Lere, (2000),"Activity-based costing: a powerful tool for pricing", Journal of Business & Industrial Marketing, Vol. 15 Iss: 1 pp. 23 - 33 Permanent link to this document: http://dx.doi.org/10.1108/08858620010311539 Downloaded on: 05-04-2012 References: This document contains references to 4 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 4868 times. Access to this document was granted through an Emerald subscription provided by CAIRO UNIVERSITY For Authors: If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Additional help for authors is available for Emerald subscribers. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization...

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