Productivity and Quality

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Activity Based Costing for Activity Based Management
Meiklejohn Paul, Director Management Consulting 17 February 2012

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

© 2012 KPMG Limited, a Vietnamese limited liability
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Overhead is an indirect or common cost that generally cannot be traced.

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

1. What is Activity Based Costing 1.2 Traditional Costing vs ABC - Example
Illustrative example in a manufacturing company Company A produced two products X and Y in the period ended 31 Dec 2011 with following information:
Product Direct material ($) Direct labour ($) Volume (units) Number of production runs Number of machine hours X 800 150 10 2 30 Y 2,000 500 100 8 100 Total overhead ($) Machine-run costs ($) (cost driver is number of machine hours) 3,900 Set-up costs ($) (cost driver is number of production runs) 11,500


Traditional Costing
Overhead per unit = Total Overhead/Total number of units = $15,400/110 = $140 Cost per unit of each product ($): Product Direct material Direct labour Overhead Total cost per unit Selling price (20% margin) X 80 15 140 235 294 Y 20 5 140 165 206

Activity Based Costing
Allocate Overhead to Activities ($): Type of Overhead Cost pool (total costs for the period) Cost driver (number of machine hours/production runs) Cost per machine hour/production run Allocate Overhead to Products: Product Number of machine hours per unit Machine-run
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