Page 249 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes  Performance Analysis: Performance analysis involves the identification of appropriate
measures to report the performance of activity centres or other organisational units
consistent with each unit’s goals and objectives. Performance Analysis aims to identify the
best ways to measure the performance of factors that are important to organisations in
order to stimulate continuous improvement.
13.4.2 Difference between Activity-based Costing and Activity-based
Management

Activity-based Costing is logical distribution of overheads, i.e. overheads are distributed on the
basis of the consumption of resources. It helps to avoid distortion of costs of products/services.
On the other hand, Activity-based Management, on the other hand, is a discipline that focuses on
efficient management so as to value of services rendered to customers. This focus on activities is
being used effectively for cost reduction, business process re-engineering, and benchmarking
and performance measurement. Activity-based Management brings about a change in viewing
at the objective by incorporation of financial perspective, internal business perspective,
innovation and learning perspective.

13.5 Activity-based Accounting

Activity-based accounting is a broader term which involves in, ‘collection, recording, analysis,
controlling and reporting of activity related costs rather than departmental or cost centres
related costs.’ It involves several activities like Activity-based Budgeting, Cost management
based on activities, performance measurement of activity, reducing the costs through elimination
of non value adding activities and also initiating innovative measure for reduction of costs.

Solved Problems

1. The budgeted overheads and cost driver volumes of XYZ are as follows.

Cost Pool Budgeted Overheads (`) Cost Driver Budgeted Volume
Material procurement 5,80,000 No. of orders 1,100
Material handling 2,50,000 No. of movements 680
Set-up 4,15,000 No. of set ups 520
Maintenance 9,70,000 Maintenance hours 8,400
Quality control 1,76,000 No. of inspection 900
Machinery 7,20,000 No. of machine hours 24,000

The company has produced a batch of 2,600 components of AX-15, its material cost was
` 1,30,000 and labour cost ` 2,45,000. The usage activities of the said batch are as follows.
Material orders – 26, maintenance hours – 690, material movements – 18, inspection – 28,
set ups – 25, machine hours – 1,800
Calculate – cost driver rates that are used for tracing appropriate amount of overheads to
the said batch and ascertain the cost of batch of components using Activity-based Costing.
Solution:
The cost driver data will be determined as given below.
Cost driver data – The rate will be determined by dividing the amount by relevant factors. The
calculations are shown below.

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