ACTIVITY 6

EVALUATIVE

LEIDY JOHANNA BELTRAN GALVIS 616260

MARYI LORENA SANCHEZ AYALA 678823
Andrea Juliana Chona Molina 660491
RAFAEL YAMIT PABON MANTILLA 679141

Minuto De Dios University Corporation - UNIMINUTO

Public Accounting - VII Semester
Cúcuta, Norte de Santander
March
2021
that allows the allocation and distribution of the different indirect costs, according to
the
activities carried out, as these are the ones that actually generate costs. This system
born from
the need to provide a solution to the problems that costs generally present
standard
when they do not accurately reflect the added value chain in the production of a product
o
specific services and, therefore, it is not possible to make an adequate determination of the
price.

This model is considered, to date, one of the most effective as it allows

to have a
greater accuracy in the allocation of company costs, and also allows for the
vision of
them by activity. The ABC costing model allows for greater accuracy in the allocation of
the
costs of companies and allows for their view by activity.

In the development of the following report, important general aspects will be disclosed.
about
this costing method, which will allow the reader to understand or delve into the
knowledge
previously acquired, and will provide a basis for determining the advantages and disadvantages
of the
application of said system to companies depending on their operation and
objectives
organizational.
The Activity Based Costing (ABC) system is a
model
that allows the allocation and distribution of the different indirect costs, according to
the
activities carried out, as they are the ones that actually generate costs. This system
born of
the need to address the issues that are usually presented by costs
standard
when they do not faithfully reflect the added value chain in the production of a product
o
specific services and, therefore, it is not possible to make an adequate determination of
price.

This model is considered, to date, one of the most effective as it allows

to have a
greater accuracy in the allocation of companies' costs, and also allows for the
vision of
they by activity. The ABC costing model allows for greater accuracy in the allocation of
the
costs of companies and allows the view of them by activity.

In the development of the following report, important general aspects will be disclosed.
about
this costing method, which will allow the reader to know or delve into the
knowledge
previously acquired, and will provide grounds to determine the advantages and disadvantages
from the
application of such a system to companies depending on their operation and
objectives
organizational.
ACTIVITY-BASED COSTING SYSTEM

The value chain is a form of business activity analysis through which

we break down a company into its constituent parts, seeking to identify sources
of competitive advantage in those value-generating activities.

This competitive advantage is achieved when the company develops and integrates activities.
of its value chain in a less costly and better differentiated way than its rivals. For
consequently, the value chain of a company is made up of all its
activities generating added value and the margins they contribute.

The purpose of analyzing the value chain is to identify those activities of the
company that could provide a potential competitive advantage.

Direct Activities: are those directly involved in the

value creation for the buyer. They are very varied, depending on the type
of the company and for example, the operations of the sales force, the
product design, advertising, assembly of parts, etc.

Indirect Activities: are those that allow the company to operate.

continuously to direct activities, such as could be the
maintenance and accounting.

Quality Assurance: in the performance of all activities

of the company.

Accounting and financial information versus managerial information

Accounting information is used for decision-making based on records of

economic facts to analyze, identify, record, and evaluate all operations
countable.

Financial Information: This information is determined quantitatively in the

reports
that is issued by the area in charge for decision making to resolve different issues
situations.

Management information is the result of a collaborative effort where integration takes place.
various
areas of an economic entity, to analyze the information collected.
Steps to follow in the implementation of an ABC costing system

Step 1: Identify the products that are the chosen cost objects.
Step 2: Identify the direct costs of the products.
Step 3: Select the activities and the cost application bases that are
they must use to allocate indirect costs to the products.
Step 4: Identify the indirect costs associated with each allocation base
costs.
Step 5: Calculate the rate per unit of each cost application base.
Step 6: Calculate the indirect costs assigned to the products.
Step 7: Calculate the total cost of the products by adding the direct costs.
the indirect costs assigned to the products.

Classification of activities

The ABC system is based on the grouping of cost centers that make up a
sequence of value of products and services of the productive activity of the company.
ABC is based on the principle that activity is the generator of costs and that
the
products consume activities and in turn, products generate activities and the
activities consume costs.

Activities can be observed from different perspectives, depending on interests.

particular goals to be achieved, which is why there are different types of
classifications, depending on the configuration of the reference that is taken to proceed
to establish its specific typology.

A. According to the functions of the company: logistics, production, human resources,

marketing and all other departments involved in the
process.

B. According to the relationship with products and services: the company's ability to
add value
to the product or service.

Main activities: directly contribute to the objective of the

organization, its costs impact the product's cost.

Secondary activities: These serve as support to the primary ones, they are costs.
the period in which the activity is carried out does not affect the cost of
product.

Definition of cost objects

A cost object can be any item for which a measurement is needed.
separate costs, such as: an apartment, a workspace, a
activity, a project or a program, among others.

There are 3 types of cost objects: operational and commercial relationships, results.

Product: the most common cost objects are products and services
of a company. Assigning a cost allows for profitability analysis and the
pricing

Operational: A cost object can be an area or function within a

company as a department, operation of tools, line of
production or process.

Commercial relationship: a cost object can be external to the company,

as a provider or a client, to determine the cost of dealing with that
entity. Another variation of the concept is the cost of renewing permits or
licenses.

Determination of resources

The costs are attributed to the product because it is assumed that each element of the product
consume resources in proportion to the volume produced. Therefore, the attributes of
product volume, such as the number of direct labor hours, hours
machine, amount spent on materials, are used as guides to assign
indirect costs.

Cost drivers or cost managers

It is a criterion for the application or distribution of costs that determines how it is distributed.
the
workload or the company's resources to the cost activities and objects, and
they can directly or indirectly influence the cost.

Primary director: represents a criterion for application and/or distribution

of the costs or resources to each of the activities.

Secondary router. It consists of an application criterion and/or

distribution of the total costs of each of the activities to the
different processes or services.

Allocation of resources to activities.

Resources are referred to as all the means that contribute to production and/or
distribution of both goods and services that reach the final customer.
The allocation of resources is carried out through an equation that directly links the
duration of a task with the necessary effort for its completion.

The allocated amount of resources to a specific task directly influences the

effort to carry it out and this is called 'effort-conditioned programming.'
Then the costs must be calculated, such as the resources for those tasks. In a large
most products and activities, the allocation is made according to efficiency and
rationalization of a fixed budget for achieving the goals where
they specify minimum and maximum ranges in quantities and duration of the execution of said
task.

The following is a graph that shows the relationship between resources, quantities, and duration.

In this costing system, all the costs and expenses that are generated are
considered as resources within a managerial hierarchy and in turn the costs
assign both to products and services, according to the consumption of activities that are
generates. In this there are no expenses, since all the resources used are classified
directly as costs.
In this system, costs directly affect the raw material and labor.
to the final products, they distribute the rest among the activities, since on one hand they
consumes resources and on the other hand, they are used to obtain the outputs, the activities
they have a direct relationship with the products, and greater effectiveness is generated in the
transformation of the cost of factors into the cost of products and services.
The resources that this system primarily implements are:

Direct materials

Labor

Technology, machinery, and equipment.

Supplies

Information systems

Insurance
 Administrative and sales capacity

The previous resources are allocated according to the project being executed, maintaining
in this the value chain and the same allocated resources are costed according to
the
next stages:

The cost allocation in this system is given in the following stages:

1. It consists of accumulating the CIF by cost centers with the difference that
not only are more centers used than in traditional methods, but
that these take another name: they are called activities.

2. Costs are assigned to jobs according to the number of

activities that are required to be completed.
Calculation of unit costs using ABC

To calculate the costs, the following must be taken into account:

1. Location of Indirect Costs in Cost Centers: to the

manufacturing that the "Service Departments" contribute to the productive ones
and the generals) referred to by the authors as 'Indirect Departments'.
Form homogeneous cost groups (costs of each group, referring to
an activity) evaluating them, the activities, separately.

2. Divide the company into activities. Identify in 'Activity Units',

it is best to apply the origin and variation of reference expenses.

3. Allocation of Indirect Production Costs Among the Activities:

Application of the manufactured articles, multiplying the 'Unit Cost of
Provide Each Activity
occupied for each product.

4. Assign the costs of the activities to the services: The allocation of

costs for this method are presented in two stages where the first consists of
accumulate the CIF by cost centers with the difference that not only
more centers are used than in traditional methods, but these
they take another name: they are called ACTIVITIES. In the second stage the
costs are assigned to jobs according to the number of activities
that are required to be completed.

5. Analyze the results: For the analysis of the results, it will be necessary to
compare the service margins with the ABC costs obtained by
services, from this comparison resulted the economic margins by
services, which must be analyzed

Activity-Based Management (ABM)

 Activity-Based Management, ABM (Activista Base Management), involves
use of the information obtained through ABC to understand and make changes
beneficial in the way companies do business.
ABM is inserted within a framework of strategic cost management and in the
continuous improvement processes, incorporating analysis techniques such as:

Activity analysis.

Cause/effect analysis through the drivers.

Analysis of activities that add and do not add value.

Quality and customer satisfaction.

Benchmarking/Best Practices.
Fundamental Principles:

Resources should not be managed, but activities.

2. Have data for the respective analysis.

3. Run the horizontal accounting system and ABC budgets.

4. Make use of the balanced scorecard.

Practical exercise

Universal auto parts, a company belonging to the supply chain of the industry
automotive, wants to know the cost in each activity of the value chain and the cost
unit price of each auto part. To do this, you must compare both methods and choose the
allocation method that yields the best cost structure.

Units produced, time spent and unit costs

Fascias
DATA Board Console forwards
Production units by order 5,000 2,000 1.500
Hours worked 6 2 4
Neither orders in the month 2 4 3
Unit cost of raw material $ 3,000 $ 222 $ 2.500
Unit labor cost $ 1,200 $ 150 $ 1.600

Report of expenses incurred for activities

Activities Cost Work unit Board Console Fascias

 Indirect forwards
Reception $ 200,000 Ni vouchers warehouse 50 10 5
Design 500,000 engineering orders. 5 9 8
Preparation of Hours per prep.
machines 300,000 orders 1 3 5
Operating hours
Production 800,000 machine 5,000 8,000 9,000
Assembly 1,000,000 No. orders 2 4 3
Total $ 2.800.000

Solution

Development by traditional method

Fascias
DATA Board Console forwards
Production units by order 5,000 2.000 1,500
Hours worked 6 2 4
Number of orders per month 2 4 3

Board 60,000
Console 16.000
Front fascias 18,000
Total hours spent 94,000

Indirect cost quota: Indirect cost/Total costs

Activities Indirect Cost

Reception $ 200,000
Design 500,000
Machine preparation 300,000
Production 800,000
Assembly 1,000,000
Total $ 2,800,000

$
Indirect cost quota: $ 2,800,000 94,000 29.79
Integration of the unit cost

Fascias
Unit Cost Board Console forwards
Unit cost of raw materials $ 3,000 $ 222 $ 2.500
Unit cost of labor $ 1,200 $ 150 $ 1,600
CIF 178.72 59.57 119.15
Unit Production Cost $4,378.72 4,219.15
 Development by ABC method

Cost assignment to activities

Cost
Cost Unit of Product Unit of Units Cost for
Activity (1) indirect
indirect (2) work (3) (4) work (5) (7) per (8)
(6)
(2/5) (3*5) (6/7)
Board 50 53,846.15 5.000 30.77
$ $
Reception Console 10 30,769.23 2.000 15.38
200,000 3.077
Fascia 5 15.384,62 1,500 10.26

Board 5 113,636.36 5,000 22.73

22,727.2
Design Console 9 204,545.45 2,000 102.27
500,000 7
Fascia 8 181,818.18 1,500 121.21

Board 1 33.333 5,000 6.67

33,333.3
Machine preparation Console 3 100,000 2,000 50.00
300,000 3
Fascia 5 166.667 1.500 111.11

Board 5,000 181,818.18 5,000 36,36

Production 36,36 Console 8,000 290,909.09 2.000 145.45
800,000
Fascia 9,000 327,272.73 1.500 218.18

Board 2 222,222.22 5,000 44.44

111.11
Assembly Console 4 444,444.44 2,000 222.22
1,000,000 1
Fascia 3 333,333.33 1,500 222.22

Summary of the unit cost

UNIT COST Board Console Fascia

Reception 30.77 15.38 10.26
Design 22.73 102.27 121.21
Machine preparation 6.67 50.00 111.11
Production 36.36 145.45 218.18
Assembly 44.44 222.22 222.22
Total CIF 140.97 535.33 682.98
Materials 3,000.00 222.00 2,500.00
MOD 1,200.00 150.00 1,600.00
C. Unit Production. $ 4,340.97 $ 907,33 $ 4.782,98
Comparison between both methods

COMPARISON Board Console Fascia

C. Unitario ABC $ 4,340.97 $ 907.33 $
C. Traditional unit $ 4,378.72 $ 431.57 $

Analysis of the changes by both methods

We observe that in the ABC method we have a better description of the tasks than
they make up the production process, this helps us to calculate costs more
exactly and thus be able to optimize the selling price.

In addition, traditional cost reflects what was spent and the ABC cost method us
shows in more detail how it was spent, this gives us greater interpretation of the
evaluate each activity carried out in the process.