Cost and Management Accounting Product
A B
Annual Output [Units] 5,000 60,000
Total machine hours 20,000 1,20,000
Total number of purchase orders
Total number of set ups
160 384
20 44
The annual overheads are as under Particulars Volume related activity costs Set up related costs Purchase related costs Total costs
Amount in Rupees 5,50,000 8,20,000 6,18,000 19,88,000
You are required to calculate the cost per unit of each Product A and B, based on, I.
Traditional method of charging overheads
II. Activity Based Costing method.
16.10 Activity Based Management The Activity Based Management is a tool of management that involves analyzing and costing activities with the goal of improving efficiency and effectiveness. Though it is closely related to the Activity Based Costing, still it differs from the same in its primary goal. The Activity Based Costing focuses on activities with the object of measuring the cost of products/services. It tries to compute the cost as accurately as possible. On the other hand Activity Based Management focuses on managing the activities themselves. In Activity Based Costing resources are traced to the activities for the purpose of computing the costs while in Activity Based Management, resources are traced to activities for evaluation of the activities themselves. In other words, efforts are made to improve the activities further. Thus Activity Based Management is a set of actions that management can take, based on information from an Activity Based Costing system, to increase/improve profitability. For continuous improvement, Activity Based Management attempts the following analysis. •
Cost Driver Analysis :- The factors that cause activities to be performed need to be identified in order to manage activity costs. Cost driver analysis identifies these casual factors. For example, in a stores department, it may be observed that slow moving and obsolete stock is not disposed of in time, the reason being the staff in the stores is not trained properly in this area. Managers have to address this cost driver to correct the root cause of this problem and take proper action.
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Activity Analysis :- Activity Analysis identifies value added and non value added activities. This analysis identifies the activities in the organization and the activity centers that should be used in Activity Based Costing system. In Activity Based Management, as said above, identification of activities into value adding and non value adding is made and efforts are made to eliminate the non value adding activities.
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Performance Analysis :- Performance analysis involves the identification of appropriate measures to report the performance of activity centers or other organizational units consistent with each units goals and objectives. Performance Analysis aims to identify the best ways to measure the performance of factors that are important to organizations in order to stimulate continuous improvement. 415