Hotel scenario – Comfort First

REPORT

Activity Based Costing for Comfort First

To: Mr. Bob Collins 31/12/xx

The following report has been prepared on activity based costing to assist you in your decision to implement this technique in Comfort First.

What is ABC?

Activity Based costing is a modern approach to dealing with overheads. It is a detailed approach to sharing overhead costs to cost units, by examining the activities involved and the amount of activity each cost unit consumes. The ideas behind ABC are that activities cause costs to be incurred, products/services or cost units create demand for these activities, and overhead costs are assigned to a product on the basis of a product/services consumption of that activity.

How ABC works:

• The major support activities of the organisation are identified.
• A cost pool (accumulates the cost of resources consumed when an activity takes place) is created for each activity identified.
• The significant factors influencing cost in each of the major activities i.e. cost drivers are identified.
• A rate is calculated for each activity by taking the total cost of a cost pool and dividing by the total of the cost driver.
• Overheads are charged to products or services on the basis of their usage of the activity.

Activities in your organisation could include making a reservation (driver being number of reservations), booking in a client (driver being number of bookings), preparing a bed room (minutes of preparation) and helping with luggage (number of items carried).

The Benefits of ABC:

• A correctly implemented ABC system will provide detailed, meaningful product costs. In your case detailed costs for each customer.
• ABC will incorporate the complexities demanded by each customer.
• ABC provides more accurate information for decision making.
• ABC will therefore result in better pricing decisions.
• Provides a new approach to cost control (control of activities) as attention is focused on the activities that drive the costs.
• Overheads are charged to products/clients on a more equitable basis taking into account the products/clients consumption of cost drivers.

I hope that the above is of use to you, but it should be born in mind that ABC can be expensive and time consuming to set up and administer. There should be quantifiable benefits to be achieved by your firm to justify its implementation. If I can be of further assistance to you, please contact me.

Retail scenario –EHS Electrical

REPORT

Activity Based Costing for EHS Electrical

To: Ms. Sally Russell 31/12/xx

The following report has been prepared on activity based costing to assist you in your decision to implement this technique in EHS Electrical.

What is ABC?

Activity Based costing is a modern approach to dealing with overheads. It is a detailed approach to sharing overhead costs to cost units, by examining the activities involved and the amount of activity each cost unit consumes. The ideas behind ABC are that activities cause costs to be incurred, products/services or cost units create demand for these activities, and overhead costs are assigned to a product on the basis of a product/services consumption of that activity.

How ABC works:

• The major support activities of the organisation are identified.
• A cost pool (accumulates the cost of resources consumed when an activity takes place) is created for each activity identified.
• The significant factors influencing cost in each of the major activities i.e. cost drivers are identified.
• A rate is calculated for each activity by taking the total cost of a cost pool and dividing by the total of the cost driver.
• Overheads are charged to products or services on the basis of their usage of the activity.

Activities in your organisation could include making a sales pitch (driver being number of pitches), demonstrating a product (driver being number of demonstrations or demonstration minutes), processing payment (number of customers paying) and carrying product to customer vehicle (number of items carried).

The Benefits of ABC:

• A correctly implemented ABC system will provide detailed, meaningful product costs. In your case detailed costs for each product. This is particularly important as the organisation is introducing computer equipment into product range.
• ABC will incorporate the complexities demanded by each product. ABC will demonstrate if computer equipment is more complex than other products and charge a more reflective share of overhead cost.
• ABC provides more accurate information for decision making.
• ABC will therefore result in better pricing decisions.
• Provides a new approach to cost control (control of activities) as attention is focused on the activities that drive the costs.
• Overheads are charged to products/clients on a more equitable basis taking into account the products/clients consumption of cost drivers.

I hope that the above is of use to you, but it should be born in mind that ABC can be expensive and time consuming to set up and administer. There should be quantifiable benefits to be achieved by your firm to justify its implementation. If I can be of further assistance to you, please contact me.