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Financial And Management Accounting: Activity Based Costing

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Question:

Write about the Financial and Management Accounting for Activity Based Costing.

 

Answer:

Meaning of Activity Based Costing

Activity based costing is an alternative to conventional costing approach. Activity based costing is operation management accounting technique in which overhead costs are assigned to activities instead of products or services (Cooper, 1990).

In this question we will discuss about the implementation of ABC approach in Art, craft and music school.

Meaning of Activity Cost Pool:

Activity cost pool is the group of costs which are incurred in order to complete certain tasks in the company.

In other words, it is called as aggregation of individual costs of the company related to particular activity such as production.

In ABC costing approach, there are 4 types of activity hierarchies which are classified according to the type of the company such as unit level, batch level, facility level and product level.

In school, each class is classified as batch due to participation of all children in a particular activity.

Cost Pools are set out below for Art, Craft and Music school:

  1. Meal activities are classified under single level activity cost pool because of the variations in number of children for this activity.
  2. Free play activities is also classified under single level activity cost pool because only some teachers have interacted with the children and also no supplies were used in this activity.
  • In these three activities:
  • Art and craft activities,
  • Music Activities and
  • Learning Activities

All are considered as a batch level cost pool because only similar number of teachers is involved.

  1. Greeting the students and discussing with the parents about each child’s performance can be classified as a separate activity cost pool or can be classified as facility sustaining costs because these activities are not dependent on the number of children and number of classes.
  2. Lastly, conferencing with every child’s parents to obtain information can be considered as a unit level activity cost pool because it depends on the time spent on number of children.
 

Meaning of Activity Cost Drivers:

Cost drivers manipulate the expenses of a particular activity of the organization.

Activity cost drivers are set out below:

  • Cost driver for free play activities are measured in time.

Reason: In school, time is allocated to each student for playing games.

  • Cost driver for learning activities are the time taken by the teachers.

Reason: In School, many teachers are involved in learning activities.

  • Number of meals provided or number of children are the cost drivers of meal activities.

Reason: Meal is provided only on the basis of number of children available at the school premises.

  • Number of children is the cost driver for conferencing with the parents.

Reason:  Parent’s meet is possible only if number of children available at the school.

Potential Benefits of ABC in Art, Craft and Music School:

As per Ozyurek and Uluturk (2015), the main benefits are as follows:

  1. ABC costing brings efficiency and accuracy because school can easily estimate the costs of the services to be provided by them. In this case, estimation on meal expenses is required otherwise it gets wasted if sufficient number of students is not available.
  2. Using of ABC, school can easily identified the unproductive services and also helps in cutback its unproductive costs in providing those services. In this case, miscellaneous activities are considered as unproductive according to me and this activity should be eliminated from the school.
  3. In school, using an ABC method helps in identifying which services bring more profits that is in this case, younger children like art, free play and music activities which bring more earnings to the school.
  4. It also helps in determining each teacher expense those are associated with a specific activity.
  5. Determination of cost per student can easily be calculated using ABC approach.
  6. More informed decisions can be taken using ABC approach.

ABC helps to manage their focus on those activities which brings profits in more elastic terms to the school.

Implementation Costs of ABC in Art, Craft and Music School:

Implementation of ABC in school requires huge costs because it traces costs for each specific activity. Further, it also requires assurance from cost management team of the school for the implementation of ABC. Moreover, control from top executives is also needed for long period of time (Helmi, 2015).

Major expenses include appointment of expert consultant of ABC; training costs are also required in order to know about how it works, installation costs of CIMA software is required.

Thus, above costs are needed in order to implement ABC in school.

Hence, it can be said that ABC establishes clear cut relationship between each activity and its respective costs.

 

References

Cooper, R. 1990, ‘Implementing an activity based cost system’, Journal of Cost management, pp.33-42.

Helmi, J. 2015, ‘The Activity-Based costing (ABC) in the institutions of higher education (IHE): Do private and public bring a different?’, Asian Journal of basic and applied sciences, vol.2, no.1, 16-30.

Ozyurek, H and Uluturk, Y 2015, ‘Application of activity based costing methods given strategic decisions in private education’,  European Journal of accounting Auditing and finance research, vol.3, no.4, pp.1-14. 

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