Question

How can the activity rates (i.e.cost per activity) for the various activities be used to target process improvement? Give examples to support your position.

Are there any barriers to using activity based costing in decision making? If so, what are they and can they be overcome with strong management support?

Answer 1

Activity based costing is the process of costing a product based upon no. Of activities involved for manufacturing of the product .

Activity rate= overhead in a particular deptt/no. Of activities (say set up) involved

Target process improvement can be a success and can lead to less costing of the product by properly analysing the activity rates as to which activity involves more no. Of non productive activities and can be monitored closely and thereby reduction in the overall cost of the product.

Example: warehouse deptt cost =$10000

No. Of store activity = 1000

So activity rate = $10

That means, to carry out one task in warehouse department $10 must be incurred. So the management expert can make easy comparisons as to whether $10 per activity is acceptable or not.. So that necessary improvements can be made based on the activities involved in manufacturing of a particular product.

Similarly

Overhead cost=$5000

No. Of setups=$100

Thus cost per setup comes out to be $50 per set up.

And necessary conclusions can be drawn from the activity rate.

Yes there are some barriers in using activity based costing in decision making process as there are some processes where it is difficult to differentiate the process into no. Of activities involved. Many a times a product is manufactured after a certain process and it becomes v. Difficult to determine activity rates based on no. Of activities involved and thus Activity based costing is not used for decision making.

This can be overcome only if the manufacturing process and activities of the product are bifurcated among different departments so that proper evaluation can be made and product is not produced as a outcome of single process rather goes through no. Of departments and activities can be easily identified This is possible only if management agrees to such change in the organisational structure of the organisation and helps in efficient decision-making.

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