Cost Drivers Examples In Service Industry

1. Cost Drivers Examples In Service Industry Ca
2. Cost Driver Pdf

Introducing ABC Activity Based Costing for Excel

Increased accuracy in product and service pricing, leading to more realistic pricing decisions, which can increase revenue. More specific information about cost drivers, allowing a better understanding of overall production costs. Identification of high-cost, low-value activities that can be cut or eliminated to improve production efficiency. Example; Features of Service Costing. The costing in a service industry can be better understood with the help of the following characteristics: Intangible Products: Service costing deals with the operating cost of products which does not have any physical form but satisfies consumer needs and wants. Cost advantage results from a reduction in costs associated with activities in a value chain. After the value chain has been defined, it's important to associate costs to the activities and then make adjustments for efficiency. Porter's 10 cost drivers are factors that can impact the cost of an activity. Service and (2) as the basis for full-cost recovery. During the project the financial data of the participating consolidators was continually reviewed and their business processes (see Chart 19) were closely examined, thus allowing the main cost drivers to be identified. To facilitate preparation of an indirect cost proposal, shown below are (1) some definitions of the term 'indirect costs,' (2) a brief discussion of indirect cost rate structures and (3) a simple example of an indirect cost rate computation. Indirect Costs (definition extracted from FAR Part 31.2).

Here is How to Perform Activity Based Cost Analysis in Only a Few Minutes, Identify Your Real Cost-Profit Information, Improve Your Current Cost-Profit Structure and Make Profitable Decisions for Your Business…

Studies have shown some interesting facts about activity based costing. While most business managers are aware of the power of ABC and the benefits of drastically improving their businesses by making relevant and fact based decisions, only a small percentage of them actually use ABC.

The 3 typical issues in ABC implementation:

1. ABC Implementation is Expensive

Activity based costing systems are expensive to develop and implement and they require continuous investment, maintenance, training and support. Many business managers are not confident that the potential benefits will justify the large investments required by their organizations.

2. ABC is Time Consuming

Developing and implementing ABC is time consuming for every company. The business requirements have to be put in place, the organizational processes must be analyzed and clearly outlined and employees must be trained in order to use the system. External help from ABC consultants is necessary during development which takes anywhere from a few months to more than a year for the entire working system to be in place.

Cost Drivers Examples In Service Industry Ca

3. It's Hard to Convince Decision Makers

It is challenging to convince management to invest the money and time in developing the ABC system. Implementing ABC and developing it into a major business initiative for the long run takes a real consideration by business stakeholders. They have to envision some real tangible benefits in order to make the go decision.

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ABC 101: What is Activity-Based Costing?

Activity Based Costing – ABC Costing Approach is a management accounting method that has helped many companies improve their profitability and cost structure. ABC costing identifies opportunities for management to improve pricing, products, services, operations and key business processes in order to improve competitiveness. Critical information that has been hidden by using traditional accounting approaches can be discovered by using activity based costing. To compete in the marketplace management must change the cost and profit management and reporting practices.

Activity Based Costing is a management accounting approach which allocate all direct and indirect (overhead) costs to cost objects (products and services) in order to help management understand critical business information. ABC allocates direct and indirect costs to products and services based on the level of activities used to create and deliver those products and services.

Activities such as purchasing, design, production, sales, marketing and customer service are utilized by different products and services (cost objects) based on their complexity and business requirements. Compared to traditional accounting, activity based costing is a decision making tool which provides more accurate cost and profit information and allows management to understand the cost and profit drivers and improve their business.

Activity-Based Management

Activity Based Management uses activity based costing information to maximize value for the customers and other stakeholders and improve profitability. Management allocates resources to critical business processes, products and customers and improves overall efficiency as well as create opportunities for cost reduction and product, service and process improvement. By identifying costs of activities and activity utilization by different products and services decision makers have accurate and timely information and are able to make better and more effective business decisions.

Activity Based Costing also identifies value added activities (activities which create value for the customer and the company) and non value added activities (activities which are currently performed but they do not create value for the customer nor for the company).

How ABC Works?

The overall objective of ABC Costing System is better understanding the overhead / indirect costs and profitability. What will change with ABC? While the overall costs and profit will remain the same the ABC Costing will inform management about profitability at the product level.

Activity Based Costing will allocate costs to products and services based on the level of resource utilization by different business activities. Each indirect cost is driven and at the same time can be controlled, planned and managed based on the business model and processes used by the company.

For example, the costs of each department and activity is driven by the company's business model or the way the company does business (ex: employee hours, number of machine hours or number of shifts will drive the cost of each activity). Manufacturing as well as service companies can use ABC to assign costs to activities and activities to products and services in order to measure profitability.

The ABC approach includes allocation of indirect costs to departments, costs from departments to activities and costs from activities to cost objects. For example, every organization has departments which will vary based on the business (groups / teams such as sales function / department , warehouse department, purchasing department, administration, etc.).

Indirect Costs from the General Ledger can be assigned by using percentage based on utilization level – for example, the rent cost can be allocated 70% to the warehouse department, 20% to administration and 10% to Sales and Marketing Department depending on the square feet used by each department.

Next, each department performance activities – for example, the design department may perform product development activities, the sales department will perform sales calls, quoting and sales presentations. Depending on the time spent by the sales force on each of these activities their indirect costs can be allocated to each activity – for example, 30% sales calls, 30% to quoting and 40% to sales meetings and presentations.

Finally, the costs of each activity is allocated to the cost objects (products and services). For example, let's consider the sales meetings and presentations activity performed by the sales department: based on the time spent by the sales force on selling and promoting each product or service the cost of sales meetings and presentations activity can be allocated 50% to Product 1, 30% to Product 2 and 20% to Product 3.

Different products and services require more or less activities in creating them and selling them to the customers. This simple example demonstrates the way ABC allocates and calculates indirect costs and assign them to cost objects which is the overall objective – each cost object / each product and service will be measured at the net profit level.

Gross Margins / Gross Profit can be misleading because some products and services will be profitable at the gross margin level but they might be losers at the net profit level if they consume too much of the company's activities. On the other hand, some products and services with lower gross margins might be very profitable at the net profit level because they are simple to create and deliver to the customers.

The following example demonstrates this point:

Business processes and operations are performed by different activities. Each activity has cost drivers which are used to calculate or estimate the cost of activities. Here are some examples of activities and cost drivers:

Examples of Business Activities:
– Purchasing
– Product Design
– Quoting
– Sales Calls
– Product Delivery
– Receiving
– Stocking

Examples of Cost Drivers:
– Number of Calls
– Percent of time spent on stocking each product
– Square Feet
– Labor Hours per Product
– Machine Hours per Product
– Number of Shipments per Product
– Receiving Hours per Product
– Stocking Hours per Product

There are different activity levels, for example unit level activities (activities performed on each unit such as packaging), batch level activities (activities performed on batch level such as scheduling and set up), product level activities (activities performed on each product such as design, engineering and marketing) and facility level activities (activities performed at each facility such as safety, training and maintenance).

How to Design Your ABC System?

Designing and implementing ABC Costing System involves identifying and defining all direct and indirect costs, company's departments, activities, cost objects and defining ABC reporting.

The first step in designing ABC System is defining the indirect costs and departments and allocating the indirect costs to each department based on cost drivers.

Next, the cost from the departments are allocated to Activities based on how much activities are consumed by each department.

Finally, costs from activities are assigned to cost objects.

Benefits of Using ABC

Compared to traditional accounting, Activity Based Costing reports accurate product and service costs and provides insight into the cost drivers and identifies value added and non value added activities providing opportunities for improvements on a general company level as well as product and customer level.

Activity Based Costing Software for Excel

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Simple and easy to use Excel Templates allow you to create high quality business insight with ABC Analysis and Reporting. This product will save you a lot of time and money. You can use this proven Activity Based Costing (ABC) approach to develop an effective ABC system for your business.

Whether you are experienced or a beginner with ABC Costing this product will help you design and implement your Activity Based Costing system and help you better understand and improve your business.

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As you've learned, the most common bases for predetermined overhead are direct labor hours, direct labor dollars, or machine hours. Each of these costs is considered a cost driver because of the causal relationship between the base and the related costs: As the cost driver's usage increases, the cost of overhead increases as well. (Figure) shows various costs and potential cost drivers.

The more accurately a company can determine the cost drivers for its products, the more accurate the costing information will be, which in turn allows management to make better use of the cost data in making decisions. As technology changes, however, the mix between materials, labor, and overhead changes. Often, improved technology means less waste of material and fewer direct labor hours, but possibly more overhead. For example, technology has changed the way pharmaceuticals are manufactured. Advancing technology allows for the now smaller labor force to be more productive than a larger labor force from earlier years. While the labor cost has changed, this decrease may only be temporary as a labor force with higher costs and different skills is often needed. Additionally, an increase in technology often raises overhead costs. How accurate, then, is the company's product cost information if it has become more efficient in its production process? Should the company still be using a predetermined overhead application rate based on direct labor hours or machine hours? A detailed analysis of the cost drivers will answer these questions.

Another benefit of looking at cost drivers is that doing so allows a company to analyze all costs. A company can differentiate among costs that drive overhead and have value, those that do not drive overhead but still add value, and those that may or may not drive the overhead but do not add any value. For example, a furniture manufacturer produces and sells wooden tables in various colors. The painting process involves a white base coat, a color coat, and a clear protective top coat. The three coats are applied in a sealed room using a spraying process followed by an ultraviolet drying process. The depreciation on the spraying machines and the ultraviolet bulbs used in the painting process are overhead costs. These costs drive or increase overhead, and they add value to the product by increasing the quality. Costs associated with repainting or fixing any blemishes are overhead costs that are necessary to sell the product but would not be considered value-added costs. The goal is to eliminate as many of the non-value-added costs as possible and subsequently reduce overhead costs.

Cost Drivers and Overhead

In today's production environment, there are many activities within the production process that can contribute to the cost of the product, but determining the cost drivers may be complicated because some of those activities may change over time. Additionally, the appropriate level of assigning cost drivers needs to be determined. In some cases, overhead costs such as inspection increase with each unit inspected, and the costs need to be allocated on a per-unit level. In other cases, the overhead costs, such as machine setup costs, are incurred each time a batch of products is manufactured and need to be allocated at the batch level.

For example, the labor hours for the staff taking, fulfilling, and inspecting orders may increase as the number of orders increases, driving up the overhead. Furthermore, the costs of taking orders or of quality inspections can vary per product and may not be captured properly. Technology improvements, including switching to automated processes for production, may decrease the labor hours of the production staff, driving the labor-related overhead downward but potentially increasing other overhead expenses. These activities—order taking, fulfillment, and quality inspections—are potential cost drivers associated with production, and they each drive the overhead at varying rates.

Cost drivers vary widely among companies.

1. After costs are accumulated into cost pools, what information would help management select the appropriate cost driver?
2. Name an appropriate cost driver for each of the following cost pools:
   1. Plant cleaning and maintenance
   2. Factory supervision
   3. Machine maintenance
   4. Machine setups

Identify Cost Drivers

How does a company determine its cost drivers for indirect materials, indirect labor, and other overhead costs? To begin the determination of appropriate cost drivers, an accountant analyzes the activities in the product production process that contribute to the cost of that product. An activity is any action that consumes company resources, such as taking orders for a product, setting up machines to produce the product, inspecting the product, and providing customer support before and through the order process. For example, Musicality's direct costs can be traced to the products, but there are indirect costs associated with using various types of material for each product. While the Orchestra product has more intricate materials and labor, it has fewer costs associated with requisitioning and conveying materials to the production line than the other products have. Additionally, examining the inspection costs indicates the Orchestra product is a simple product to inspect, so random quality inspections are sufficient. But individual inspections for both the Solo and Band products are critical, and the overhead related to inspection costs should be based on the number of inspections.

As you can imagine, the unique aspects of the production process for each product affect the overhead cost of each product. However, these costs may not be allocated to the products appropriately when overhead is applied using a predetermined rate based on one activity. While Solo, Band, and Orchestra might appear to be different only in quality, they are actually very different from each other when it comes to manufacturing overhead costs.

Free software for android tablet pc. Whether the products produced require significantly different overhead resources or not, the company benefits from understanding what its cost drivers are. The more efficiently each product's activities are tracked, the more actual cost drivers are discovered, and the more accurately overhead can be assigned to each product.

The value of analyzing cost drivers can be used in budgeting beyond allocating overhead to products. American Express has forums designed to help small businesses be successful. Knowing the cost drivers for your business can help with budgeting. American Express states that all business activities are related to five main cost drivers:¹

Cost Driver Pdf

• Employee head count is often the driver for office supply expense.
• Salesperson head count is often the driver for auto and other employee travel expense.
• The number of leads required to reach the target sales goal is often the driver for advertising, public relations, social media, search engine optimization expense, and other expenses associated with generating leads.
• Sales and all related variable expenses are often the driver for commissions, bad debt, insurance expense, and so on.
• Fixed costs, such as postage, web hosting fees, business licenses, and banking fees, are often overlooked as cost drivers.

Key Concepts and Summary

• Overhead costs are analyzed and grouped based on similar activity bases. A cost driver, such as inspections, machine setups, or order taking, is selected for each cost grouping.
• Analysis of cost drivers allows for better selection of true overhead cost drivers and more appropriate allocation of overhead.

Gmod how to delete props. (Figure)Which is not a step in analyzing the cost driver for manufacturing overhead?

1. identify the cost
2. identify non-value-added costs
3. analyze the effect on manufacturing overhead
4. identify the correlation between the potential driver and manufacturing overhead

(Figure)Overhead costs are assigned to each product based on ________.

1. the proportion of that product's use of the cost driver
2. a predetermined overhead rate for a single cost driver
3. price of the product
4. machine hours per product

(Figure)(Figure)When is an activity-based costing system better than a traditional allocation system?

(Figure)What is the advantage of labeling activities as value added or nonvalue added?

Non-value-added costs can often be eliminated since they are rarely essential, and identifying them helps managers reduce their costs.

(Figure)What conditions are necessary to designate an activity as a cost driver?

(Figure)For each cost pool, identify an appropriate cost driver.

1. order department
2. accounts receivable processing
3. catering
4. raw material inventory

Answers may vary but should be similar to the following: A. number of orders; B. number of customers; C. number of meals; D. number of material requisitions received.

(Figure)Identify appropriate cost drivers for these cost pools:

1. setup cost pools
2. assembly cost pool
3. supervising cost pool
4. testing cost pool

(Figure)Match the activity with the most appropriate cost driver.

(Figure)Identify appropriate cost drivers for these cost pools:

1. material cost pool
2. machine cost pool
3. painting cost pool
4. maintenance cost pool

(Figure)Match the activity with the most appropriate cost driver.

(Figure)A local picnic table manufacturer has budgeted these overhead costs:

They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown:

Recent success has yielded an order for 1,000 tables. Assume direct labor costs per hour of $20. Determine how much the job would cost given the following activities:

(Figure)Explain how each activity in this list can be associated with the corresponding unit or batch level provided.

1. Assembling products: unit level
2. Issuing raw materials: batch level
3. Machine setup: batch level
4. Inspection: unit level
5. Loading the labeling machine: batch level
6. Equipment maintenance: batch level
7. Printing a banner: unit level
8. Moving material: batch level
9. Ordering a part: batch level

Knight rider 2000 full movie torrent. (Figure)A local picnic table manufacturer has budgeted the following overhead costs:

They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown:

Recent success has yielded an order for 1,500 tables. Determine how much the job would cost given the following activities, and assuming an hourly rate for direct labor of $25 per hour:

(Figure)Explain how each activity in this list can be associated with the corresponding unit or batch level provided.

1. Assembling products: batch level
2. Issuing raw materials: unit level
3. Machine setup: unit level
4. Inspection: batch level
5. Loading the labeling machine: unit level
6. Equipment maintenance: unit level
7. Printing a banner: batch level
8. Moving material: unit level
9. Ordering a part: unit level

(Figure)College Cases sells cases for electronic devices such as phones, computers, and tablets. These cases have college logos or mascots on them and can be customized by adding such things as the customer's name, initials, sport, or fraternity letters. The company buys the cases in various colors and then uses laser technology to do the customization of the letters and to add school names, logos, mascots, and so on. What are potential activity-based costing pools for College Cases, and what would be appropriate cost drivers?

Footnotes

• 1American Express. '5 Cost Drivers to Help You Make Accurate Expense Projections.' June 23, 2011. https://www.americanexpress.com/us/small-business/openforum/articles/5-cost-drivers-to-help-you-make-accurate-expense-projections/