FACULTY OF BUSINESS

ACCOUNTING SCHOOL

ACADEMIC REPORT

COURSE:
Advanced Cost Accounting

THEME:
Activity-Based Costing System

AUTHOR:
Rosales Herrera Piero Alex

TEACHER:
Hurtado Celmi Jacqueline Lilian

Huaraz - Perú

2024

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 INDEX

INTRODUCTION……………………………………………………………………. 3
DEVELOPMENT……………………………………………………………………. 4
CONCLUSIONS……………………………………………………………………...6
BIBLIOGRAPHIC REFERENCES…………………………………………………7

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 INTRODUCTION

Activity-based costing (ABC) is a mechanism of great importance, it

indicates the shortest and most precise way to eliminate everything that
has no value and that constitutes a heavy burden for the company to
compete successfully in product or service markets. It is practically a
correctly applied system. It is the combination of human, technological,
material resources and the methods and productive environment
necessary to develop a product or service. For example, the assembly
process of a final product is a specific activity that generates productivity
for the company; It is also important to offer a service to a customer,
such as washing a car or an aesthetic service.
The ABC can be used in any type of company or production or service
organization because it is part of a tool that allows a more accurate cost
calculation than traditional models and also to make a process analysis
that allows its improvement.
This system is based on products consuming activities and activities
resources (costs). Thus, if you have information on what each activity
costs and what activities are necessary for the generation of each
product, then you can know how much each product costs based on the
activities that constitute it.
This method allows a more accurate cost calculation to be carried out
through a system that allows indirect costs to be assigned to products in
a more precise way. A lower allocation precision can lead to over-costing
and subcosting products, which generates a subsidy of the products paid
for by the costed envelopes.
As long as the mix of sales of the different products continues to be in
the budgeted proportions, these subsidies do not pose problems in the
financial results; But if this mix changes, total costs can increase, putting
the organization's financial results at risk, especially in competitive
environments
Assigns and distributes indirect costs according to the activities carried
out in the process of making the product or service, identifying the origin

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of the cost with the necessary activity, not only for production but also for
its distribution and sale; The activity is understood as the set of actions
that aim to incorporate added value to the product through the production
process.

DEVELOPMENT

OBJECTIVES

 Identify and eliminate those products and services that are not
profitable and lower the prices of those that are overvalued
(objective of the portfolio of products and services).
 Identify and eliminate production processes or services that are
inefficient and assign processing concepts that lead to the same
product with better performance (process reengineering objective).

APPLICATION

 It is applicable to all financing, costing and accounting of the

company:
 It is a modeling process applicable for both full scope and partial
views.
 It helps identify inefficient products, departments, and activities.
 It helps allocate more resources to profitable products,
departments, and activities.
 It helps control costs at any level by product and at the
departmental level.
 It helps to find unnecessary costs that can be eliminated.
 It helps to price a product or service with any desired analytical
resolution.

IMPLEMENTATION

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 Identify and assess ABC needs: Determine the feasibility of the
ABC method within an organization.
 Training Requirements - Basic training for all employees and
workshop sessions for senior managers.
 Define the scope of the project - Evaluate the mission and
objectives of the project.
 Identify activities and driving factors: Determine what drives which
activity.
 Create an operational and cost flow chart: how resources and
activities relate to products and services.
 Collect data: collect data where the diagram shows the operational
relationship.
 Build a software model, validate it, and reconcile it.
 Interpret results and prepare management reports.
 Integrate data collection and reporting.

Treating fixed costs as variables: The potential problem with ABC, like
other cost allocation approaches, is that it essentially treats fixed costs as
if they were variables. Without proper understanding, this can give some
people an inaccurate understanding that can then lead to poor decision-
making. For example, assigning PPE to individual products can lead to
the discontinuation of products that appear unprofitable after allocation,
even if in reality their discontinuation will negatively affect the bottom line.

Follow-up costs: Even at ABC, some overhead costs are difficult to

allocate to products and customers, such as the CEO's salary. These
costs are called "business sustainment" and are not allocated to products
or customers because there is no meaningful method. However, this set
of unallocated overhead costs.

Transition to Automated Activity-Based Cost Accounting: The

prerequisite for lower cost when performing ABC is to automate data
capture with an accounting extension that leads to the desired ABC
model. The well-known approaches to event-driven accounting simply

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show the method of automation. Any transition of a current process from
one stage to the next can be detected as a relevant event. Paired events
easily form the respective activity.
ADVANTAGES
• Identification of activities that add value: ABC helps to identify which
activities add value to the final product or service. This allows you to
improve processes and eliminate or reduce activities that do not add
value.
• Accurate cost allocation: ABC assigns costs to products or services
more precisely, since it considers the direct relationship between
activities and resource consumption.
• Optimal decision making: ABC allows you to make decisions to make
changes, such as in prices, profitability or strategies.
• Resource optimization: ABC helps optimize the use of resources.
• Better inventory management: ABC helps identify the most important
products for the company's success and improve inventory management.
• Cost reduction: ABC helps reduce costs.
• Better customer service: ABC helps reduce stockouts and improve
customer service.

DISADVANTAGES
• Expensive and involved: Can be expensive to implement and
maintain.
• Time consuming: The process of establishing and maintaining the
ABC method can be very lengthy.
• Exclusion of costs: There may be costs that are not included.
• Not useful for demand planning: It is not an appropriate tool for
demand planning and should not replace a sales forecasting model.
• Frequent reclassification: In some businesses, it is common for more
than half of the products to be reclassified between one analysis and
another.
• Does not consider interdependencies: Often does not take into
account interdependencies between products.

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• Subjective assignment: The assignment of products to categories A,
B and C can be subjective.
• Not enough information: Small businesses may not have enough data
to accurately classify their items.

STAGES FOR ASSIGNMENT

First stage: In this stage, the costs are classified into a set of general
costs or pool for which the variations can be explained by a single cost-
driver.

Second stage: In this stage, the cost per unit of each pool is assigned to
the products. It is done using the pool ratio calculated in the first stage
and the measurement of the amount of resources consumed by each
product. The calculation of the costs assigned from each cost pool to
each product is: Applied overhead costs = Pool ratios * Used cost-driver
units

Allocation factors: Allocation factors are directly related to the stages

versus their design and operation. These factors are the choice of cost
pools, the selection of means of distributing the overall costs to the cost
pools, and the choice of a cost-drivers for each cost pool. These factors
represent the basic mechanism of an ABC system.

CONCLUSIONS

In a company you need to have a certain type of inventory control to

have a scope of your material, so I can say that the ABC system is a
method that serves to assign costs, correct deficiencies that may have
when comparing the resources consumed with the final products
because the ABC inventory tool has a very important flexibility
component, since it can categorize products according to the company's
priority or it can give different approaches and analyze the most

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 convenient inventory criterion since on such occasions, a part can be
critical for a system if its absence causes a significant loss. In this case,
regardless of the classification of the part, special care must be taken
with the inventory of this part, executing a permanent control and a safety
stock.

BIBLIOGRAPHIC REFERENCES

- Wikipedia The Free Encyclopedia Costeo Basado en Actividades

(ABC) [Link]
- BSG Institute Costeo Basado en Actividades (ABC)
[Link]
Actividades-ABC-6
- El Economista Costeo Basado en Actividades (ABC)
[Link]
coste-abc