Activity Based Costing Case Essay

1207 words - 5 pages

Managerial & Cost

Activity-Based Management
Made Possible By

Activity-Based Costing
Supervised by Professor Majboor Alnamri

Prepared by:
EMBA Student


Over/Under Costing
Methods of Allocating Indirect Cost
Refining a cost system
Costs/Benefits of ABC
ABC in service & retail
Example from an Organization


Over Costing & Under Costing

Over Costing—a product consumes a low level of
resources but is allocated high costs per unit.
Under Costing—a product consumes a high level of
resources but is allocated low costs per unit.



Activity-Based Costing
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All or most costs are identified as output unit-level

Products make diverse demands on resources
because of differences in volume, process steps,
batch size or complexity.

Benefits of ABC Systems
Products that a company is well-suited to make and
sell show small profits while products for which a
company is less suited show large profits.
Complex products appear to be very profitable and
simple products appear to be losing money.

Operations staff have significant disagreements with
the accounting staff about the costs of
manufacturing and marketing products and services.


Limitations of ABC Systems
The main limitations of ABC are the measurements
necessary to implement the system.
ABC systems require management to estimate costs of
activity pools and to identify and measure cost drivers
for these pools.
Activity-cost rates also need to be updated regularly.
Very detailed ABC systems are costly to operate and
difficult to understand.

ABC In Service & Merchandising
The general approach to ABC in the service and
merchandising areas is very similar to the approach in
Costs are divided into homogeneous cost pools and
classified as output unit-level, batch-level, product- or
service-sustaining and facility-sustaining costs.
Costs are allocated to products or customers using activity
drivers or cost-allocation bases that have a cause-andeffect relationship with the cost in the cost pool.

ABC In Service & Merchandising

ABC implementation is widespread in a variety of
applications outside manufacturing, including:
• Health Care
• Banking
• Telecommunications
• Retailing
• Transportation


ABC In Service

King Faisal Specialty Hospital & Research Center
Jeddah, Saudi Arabia
King Faisal Specialty Hospital & Research Center (KFSH&RC) is ranked amongst
top 50 hospitals in the world placed at 28th position and 1st in Kingdom of Saudi
Arabia. The hospital is the national referral center for oncology, organ
transplantations, cardiac surgery, genetic diseases, and more. It operates
approximately 1100+ beds. Oncology Centre of the KFSH&RC provides
comprehensive cancer treatment, education and training and clinical research.


ABC In Service
Business Problem
• Data required for costing was maintained on an excel based system
with data from many supporting systems- Oracle GL, Venus and Data
Warehouse. It was time consuming and the risk of errors was high.
• KFSH recognized that with over 220 million chargeable services each
year, a system was required that could provide robust data for
decision making purposes whilst being easily maintained and
provide integration with existing data source systems.

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