Unit
i l01
l :itCost
is it& Management
i ti s s'll it
as
Accounting
l 1 I 1 Techniques
itionaianopiÉi.es
Estimation classification ofOverheads
Overheads are classified and assigned a standingorder number
Departmentalisation
ofOverheads
After overheads costs have been collected under various standingorder
numbers the next step is to allocate and apportion the overheads toproduction
andservice departments Thisprocess ofAllocation and Apportionment ofoverheads
to different departments or costcentres is called Departmentalization or
Primary DistributionofOverheads Itinvolvestwoactivities
Allocation directlyattributabletocostc entres
distributed
among centre insomeequitableproportion
morethan cost
Apportionment
ReApportionment of Overheads
The next step is to reapportion the service departmentcosts to th
production department This is necessary as our ultimate objective
charge overheads to cost units no costunits are produced in
service departments Thisisalsocalled as Secondary distribution
Absorptionof Overheads
The total overhead costpertaining to a productiondepartment
cost centre is then charged to or absorbed in the cost of the
products or cost units passing through that centre This is called as
absorption It is defined as charging of overheads to cost units
Traditional Absorption Costing was developed whenmanufacturers produced a
narrowrangeofproducts overheadswereonly a small proportion oftotalcost
ModernBusinessesuse AMT andoverhead costs have become larger TraditionalAbsorption
costing assumes allproducts consume all support resourcesin proportion to production
, volume
greatoverheadproportion highvolumeproducts littlediversity fewersupportservices
smalloverheadproportion lowvolumeproducts greaterd iversity moresupport servic
ActivityBasedCosting
It is an accountingmethodologythat assigns costs to activities ratherthan products or
services ABCis a techniquewhichinvolves identification
ofthecost witheachcostdrivin
activity making it thebasisfortheapportionmentofcostsoverdifferent costobjects
driveristhe
Cost factort hath asthe
most
Yffice
onthecost ofan Itis basedontheideathat activity causescost
manufacturingproductscreatesdemand forsupportactivities
costs areassignedbased on a products consumption
of
theseactivities
Steps in ABCcosting
identifyan organisationsmajoractivities thatsupportmanufacture ofproducts
costpools
groupoverheads into activities according tohowtheyaredriven
identifycostdriversforeachactivity
perunitofcostdriver
calculatecost
absorbactivitycostsinto production based on usage
ofcostdrivers
TraditionalAbsorption Costing V15 Activity Based Costing
overheads are related to cost centres overheads are related to activity ar
departments grouped intoactivitycostpools
costs are relatedtocostcentres thus costs are relatedto activities hene
notrealisticofcostbehaviour more realistic
timeis assumed to beonlycostdriver activitywise costdrivers are
Usage
diversityaproducts
OHarehigh
production iiiT.ii.is
realistic
iimminriinsaasion
estimatefeastsprofits
part
appraisal
hi
fi 1 ocamencated
withmultiplec ostdrivers
complexsituations
inuseofresourcesbyproducts
difference
cost ereduction
control
enist
arbitraryapportionmentmay
notd rivenbyvolume
resources
effective
feast
drivers
ifonerangeofproductswithsimilar
m anagement benefit
reduced costs
, determined
eithermultipleoverheadrecovery rateor activitywise recovery rates are
singleoverhead recovery ratemay be determinedandthere is no conceptof
determined
singleoverhead recovery rate
costs are assigned to cost units costs are assigned to costobjects
costcentrescannot be eliminated Thus essential activities can be simplified
not suitableforcostcontrol andunnecessary activities eliminated
Thus it aids cost control
Targetcosting
Target costing involves setting a targetcostby subtracting a desiredprofitm arginfromthe
targetsellingprice It is a structuredapproachto determiningcost
Targetcostisthecost atwhich a productmustbeproducedandsold inordertoachieveth
requiredamountofprofitattargetsellingprice When a product isfirstplanned its
estimatedcost is oftenhigherthanitstargetcost Theaim targetcostingistofind
of ways
toclose thiscostgap
Continuous emphasis on productcosts throughout the lifecycleenables control overall possible
costingissues Itthusimprovesprofitabilityby precisely targetingpricesatwhichproductcan be
profitably fielded inthemarket asagainstcostplusmodel Thus it results innotonly
it ii.fi iij.iiiingntro
leadership
oftargetsellingprice
PIinforces Tevelopment
toptobottomcommittementtowards islengthened
process
innovation c ost
large cuttingcanresultinfinger
p ointing
enhancesproductlifecycle
encouragesadoption ofvalueaddingactivities
realsavingsusingmgmtc ontrolsystemsto
controlstrategies fi I
iÉ Étt
nn
Efatim
naasive
mktdrivenapproachtowardsc ost
i l01
l :itCost
is it& Management
i ti s s'll it
as
Accounting
l 1 I 1 Techniques
itionaianopiÉi.es
Estimation classification ofOverheads
Overheads are classified and assigned a standingorder number
Departmentalisation
ofOverheads
After overheads costs have been collected under various standingorder
numbers the next step is to allocate and apportion the overheads toproduction
andservice departments Thisprocess ofAllocation and Apportionment ofoverheads
to different departments or costcentres is called Departmentalization or
Primary DistributionofOverheads Itinvolvestwoactivities
Allocation directlyattributabletocostc entres
distributed
among centre insomeequitableproportion
morethan cost
Apportionment
ReApportionment of Overheads
The next step is to reapportion the service departmentcosts to th
production department This is necessary as our ultimate objective
charge overheads to cost units no costunits are produced in
service departments Thisisalsocalled as Secondary distribution
Absorptionof Overheads
The total overhead costpertaining to a productiondepartment
cost centre is then charged to or absorbed in the cost of the
products or cost units passing through that centre This is called as
absorption It is defined as charging of overheads to cost units
Traditional Absorption Costing was developed whenmanufacturers produced a
narrowrangeofproducts overheadswereonly a small proportion oftotalcost
ModernBusinessesuse AMT andoverhead costs have become larger TraditionalAbsorption
costing assumes allproducts consume all support resourcesin proportion to production
, volume
greatoverheadproportion highvolumeproducts littlediversity fewersupportservices
smalloverheadproportion lowvolumeproducts greaterd iversity moresupport servic
ActivityBasedCosting
It is an accountingmethodologythat assigns costs to activities ratherthan products or
services ABCis a techniquewhichinvolves identification
ofthecost witheachcostdrivin
activity making it thebasisfortheapportionmentofcostsoverdifferent costobjects
driveristhe
Cost factort hath asthe
most
Yffice
onthecost ofan Itis basedontheideathat activity causescost
manufacturingproductscreatesdemand forsupportactivities
costs areassignedbased on a products consumption
of
theseactivities
Steps in ABCcosting
identifyan organisationsmajoractivities thatsupportmanufacture ofproducts
costpools
groupoverheads into activities according tohowtheyaredriven
identifycostdriversforeachactivity
perunitofcostdriver
calculatecost
absorbactivitycostsinto production based on usage
ofcostdrivers
TraditionalAbsorption Costing V15 Activity Based Costing
overheads are related to cost centres overheads are related to activity ar
departments grouped intoactivitycostpools
costs are relatedtocostcentres thus costs are relatedto activities hene
notrealisticofcostbehaviour more realistic
timeis assumed to beonlycostdriver activitywise costdrivers are
Usage
diversityaproducts
OHarehigh
production iiiT.ii.is
realistic
iimminriinsaasion
estimatefeastsprofits
part
appraisal
hi
fi 1 ocamencated
withmultiplec ostdrivers
complexsituations
inuseofresourcesbyproducts
difference
cost ereduction
control
enist
arbitraryapportionmentmay
notd rivenbyvolume
resources
effective
feast
drivers
ifonerangeofproductswithsimilar
m anagement benefit
reduced costs
, determined
eithermultipleoverheadrecovery rateor activitywise recovery rates are
singleoverhead recovery ratemay be determinedandthere is no conceptof
determined
singleoverhead recovery rate
costs are assigned to cost units costs are assigned to costobjects
costcentrescannot be eliminated Thus essential activities can be simplified
not suitableforcostcontrol andunnecessary activities eliminated
Thus it aids cost control
Targetcosting
Target costing involves setting a targetcostby subtracting a desiredprofitm arginfromthe
targetsellingprice It is a structuredapproachto determiningcost
Targetcostisthecost atwhich a productmustbeproducedandsold inordertoachieveth
requiredamountofprofitattargetsellingprice When a product isfirstplanned its
estimatedcost is oftenhigherthanitstargetcost Theaim targetcostingistofind
of ways
toclose thiscostgap
Continuous emphasis on productcosts throughout the lifecycleenables control overall possible
costingissues Itthusimprovesprofitabilityby precisely targetingpricesatwhichproductcan be
profitably fielded inthemarket asagainstcostplusmodel Thus it results innotonly
it ii.fi iij.iiiingntro
leadership
oftargetsellingprice
PIinforces Tevelopment
toptobottomcommittementtowards islengthened
process
innovation c ost
large cuttingcanresultinfinger
p ointing
enhancesproductlifecycle
encouragesadoption ofvalueaddingactivities
realsavingsusingmgmtc ontrolsystemsto
controlstrategies fi I
iÉ Étt
nn
Efatim
naasive
mktdrivenapproachtowardsc ost
