Question

As the representative of the local accounting club, you have been asked by the dean to help her understand the costs of the different degrees offered at the school. You decide to use an activity-based cost system. Write a report outlining the first two steps of developing an ABC system for this purpose: (1) Identify the activities, and (2) identify the activities associated with each activity.

Answer 1

Now days Activity Based Costing Systems (hereinafter referred as ABC System) are very popular as it allocates the overheads cost to their respective activity and resources consumed/used, hence its a very efficient manner to allocate the overheads than tha traditional costing mehtod where Blanket Rate or Overhead Rate is used to allocate the Overheads. However application of ABC System requires extensive knowledge.

We are hereby appointed by the Dean to help her understand the costs related to school and define the steps of developing ABC System in details to her.

1. IDENTIFY THE ACTIVITIES

The first task in developing a ABC system is to identify various activities of school which shall be base for the whole ABC System as cost are allocated to these activities. The major and important aspects of school shall be considered to identidy such activities. for example, The major overhead costs related to school which can be assigned activity wise are Finance Department cost (which collects fees from students, incurrs any expenditure on school, make payment to staff of school etc), Teacher Salary Expenses (which imparts education to childrens and are backbone of school), Ceremony Expenses such as Parent teecher meetings, Annual Functions, Alumni Meets etc. , Maintainence Costs (Lawn Maintainence, Security Staff, Janitor Services, Fuel Expenses or Electricity Expenses etc. These could be the main activities of schools. it shall not be restricted to them only.

2. IDENTIFY THE COST AND COST DRIVERS RELATED TO SUCH ACTIVITY

After we ascertain the Activities of school to allocate overheads, the another important aspect to ascertain the cost which needs to be allocated and drivers which will allocate the cost in ratio of activity consumed.

a. Finance Department:: Cost relating to Finance departments are Salary of Finance Staff, Printing cost of receipts and their conterfeits, cost of maintainig records of fees received and salary paid, cost of sending reminders to students who had not deposited their fees yet, Cost of refreshments to parents who had come to deposit fees of students etc. Now all of such cost shall be totalled and shall be allocated on the basis of No of Total students.

b. Teacher Salary Expense: All such cost such as salary given to teacher, supervisors, Manager, Principal etc shall form part of this activity which shall be allocated on the basis of total no of students in school in a year. Sub Division could be made on basis of Primary Classes and Secondary Classes as well.

c.Ceremony Expneses: Such expenses pertaining to conduct such meetings/ceremony like Venue charges, Refreshments Charges, Lights and Djs charges, Decoration Charges shall be accumulated and will be dividend on basis of No of Events held in a Year.

d. Maintainence Expenses: Miscellaneous expenses such as Janitor charges, Security services, electricity expenses, fuel expenses shall form a part and will be allocated on the basis of total square meter area.

in this manner, ABC System for school shall be developed.