18-01-2013, 03:20 PM
Activity Based Costing & Transfer Pricing
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ABSTRACT
Activity Based Costing (ABC) is a method for developing cost estimates in which the project is subdivided into discrete, quantifiable activities or a work unit. The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s.
Activity Based Costing
Activity based costing is that in which costs are first
traced to activities and then to products.
Focuses on activities performed to produce products.
System assumes that activities are responsible for the incurrence of costs and products create demand for these activities.
ABC tries to ascertain the factors that cause each major activities and the relationship between activities and products produced.
Stages of Activity Based Costing
Identify the chosen cost objects : The cost objects of any organization are the products or services and the goal is to first calculate the total cost of manufacturing and distributing these products and their unit cost.
Identify the different activities within the organization :After the identification of cost objects, the main activities, which are being performed in the organization, have to be identified. Usually the number of over cost centers in ABC will be much more as compared to traditional overhead system.
Identifying the direct cost of products :The direct cost of products or objects may comprise direct material cost, direct labor cost and direct expenses
Transfer Pricing
In divisionalsied companies, where the profit or investment centers are created, there is likely to be inter-divisional transfer of goods and services and this internal transfer create the problem of transfer pricing.
A transfer price is that notional value at which goods and services are transferred between divisions in a decentralized organization.
Transfer prices are normally set for intermediate products which are goods and services that are supplied by the selling division to buying division.