Financial Modelling - Activity Based Costing

Financial Modelling - Activity Based Costing

1. Model: Activity based Costing
   
   Activity-based costing (ABC) is a costing approach that assigns resource costs to cost objects such as products, services, or customers based on activities performed for the cost objects (McGraw Hill). The evidence of this costing method is that a firm’s products or services are the consequences of actions and events use incomes which sustain overheads. Rates of incomes are allocated to doings grounded on the accomplishments that use or consume resources (resource consumption drivers) and costs of undertakings are assigned to cost objects based on activities performed for the cost objects (activity consumption drivers). ABC knows the fundamental or direct relations among resource costs, cost drivers, activities, and cost objects in transmission costs to activities and then to cost objects. ABC assigns factory overhead costs to cost objects such as products or services by identifying the resources and activities as well as their costs and amounts needed to produce output. Using resource consumption cost drivers, a firm determines the resource costs consumed by activities or activity centres (activity cost pools) and calculates the cost of a unit of activity. The firm then allocates the cost of an action to products or services by increasing the rate of respectively action by the quantity of the action spent by each of the cost objects.
   
   

1. Advantages Of Activity-Based Costing (ABC)

ABC delivers extra precise and explanatory product rates, principal to added exact product and patron profitability capacities and to well-informed tactical choices about set a price, product lines, and market subdivisions. ABC offers more correct sizes of activity-driving costs, assisting managers to develop product and route value by creation better invention design choices, better customer provision decisions, and development value enhancement tasks. The ABC system offers the evidence to classify areas where process enhancement is needed.

1. Disadvantages Or Limitations Of Activity-Based Costing (ABC)
   
   Not entirely rates have correct or unmistakable activity or source consumption cost drivers. More or less costs need distributions to sections and products constructed on random volume measures since finding the activity that reasons the cost is unreasonable. Instances are facility-sustaining costs such as the costs of the information system, factory superior’s salary, factory coverage, and belongings taxes for the factory. Product or service overheads identified by an ABC system are likely to not include all costs associated with the product or service. Product or service costs typically do not include costs for such activities as marketing, advertising, research and development t, and product engineering even though some of these costs can be traced to individual products or services. Product costs do not include these costs because generally accepted accounting principles (GAAP) for financial reporting require them to be treated as period costs.
   
   
   

1. Background of Company

Navy and Heavy Engineering Holdings Berhad (NHEB) is a highest offshore and navy facilities source in Malaysia, focused mainly on the oil and gas section. It deals a wide-ranging scale of offshore production, offshore transformation and navy repair amenities at two yards in Semenyih, Malaysia, namely NHE East and MMHE West. In excess of the span of 30 years, NHB has developed naturally although augmenting its competences and service contribution over strategic companies with worldwide front-runners such as Technip SA of France, Samsung Heavy Industries of South Korea and ATB Riva of Italy. Today, the Group has a track record of transporting combined and multifaceted services, as well as deepwater oil and gas structures and support services, to local and world-wide oil and gas clients. It is also documented for its capability in LNG carrier repair and dry cutting, and as a one-stop centre for offshore adaptation.