Meet.. Mr. Sam Finance Manager XYZ Inc A No Nonsense Money Manager in Office and personal life. Likes to vent out his official pressures through pure entertainment BUT……. Always selects his options considering his Wallet.

Of course …. Mr. Sam, Do u know the amount spend on entertainment last month?

Sure….. Tell Me How much ????

My last month entertainment expenses are $ 500 Mr. Sam Two Movies (2*50) = $ 100 Dinning Out (7 times) = 350 Visit to friends house = Total Ent. Expenses $

Fabulous Mr. Sam, your approach is excellent Thank You!!!... This is the same methodology I use in pricing my products/services

Ok Mr. Sam, Have you heard of Activity Based Costing Yes, I do. Allocating costs to various products and services based upon the activities performed

...Want to know your entertainment expenses using ABC ? Are you doubting my analysis? Anyway Go Ahead……. Lets see how different it is..

...Tell me some of your favorite entertainment activities Oh my favorites…….. Watching TV Family Conversation Movies Dining out Holidaying

Fine… Tell me what you spend on them Sorry I can’t tell exact amount spent on them. BUT.... I can tell some of the related expenses

That’s Fine… Tell me your monthly expenses on those activities Ok!!! Cable Charges $ 100 Travelling Expenses 800(10% on Holidaying) Food Expenses 900(30% Dinning Out) Telephone Exp. 300(10% Family Related) Movie Exp. 100

Now let me introduce you to ABC Magic

Expenses Cable Charges $ 100 Travelling Expenses 800 Food Expenses 900 Telephone Exp. 300 Movie Exp. 100 Activities Watching TV Movies Family Conversation Dinning Out Holidaying Step one List down Activities & Expenses as shown below

Resource/Expenses Cable Charges $ 100 Travelling Expenses 800 Food Expenses 900 Telephone Exp. 300 Movie Exp. 100 Activities Watching TV Movies Family Conversation Dinning Out Holidaying Step one Allocating all expenses to activities using a driver. Driver can be percentage, head count etc. Resource Driver

Expenses Cable Charges $ 100 Travelling Expenses 800 Food Expenses 900 Telephone Exp. 300 Movie Exp. 100 Activities Watching TV $ 100 Movies Family Conversation Dinning Out Holidaying 100% allocating cable expenses to watching TV using percentage as driver

Expenses Cable Charges $ 100 Travelling Expenses 800 Food Expenses 900 Telephone Exp. 300 Movie Exp. 100 Activities Watching TV $ 100 Movies Family Conversation Dinning Out 80 Holidaying 80 10% Allocating10% of travelling expenses to Dinning out and another 10% to Holidaying using percentage as driver

Expenses Cable Charges $ 100 Travelling Expenses 800 Food Expenses 900 Telephone Exp. 300 Movie Exp. 100 Activities Watching TV $ 100 Movies Family Conversation Dinning Out(80+360) 440 Holidaying(80+45) % 5% Allocating 40% of food expenses to dinning out & 5% to holidaying

Expenses Cable Charges $ 100 Travelling Expenses 800 Food Expenses 900 Telephone Exp. 300 Movie Exp. 100 Activities Watching TV $ 100 Movies Family Conversation 30 Dinning Out 440 Holidaying % Allocating 10% of telephone expenses to family conversation

Expenses Cable Charges $ 100 Travelling Expenses 800 Food Expenses 900 Telephone Exp. 300 Movie Exp. 100 Activities Watching TV $ 100 Movies 100 Family Conversation 30 Dinning Out 440 Holidaying 125 Total $ % Allocating movie expenses to Movies

Mr. Sam, Your entertainment activities cost $ 795 and not $ 500 Sorry How can it be I watch television not only for entertainment, also to keep myself updated with the latest news, around each

Hold Down..... Mr. Sam, there is one more step to go Not only that Out of seven dinning outs, one is with my clients

Product/Service Entertainment Step Two Allocating activity costs to the product/service/aspect to be measured(here entertainment). List down them as shown below Activities Watching TV $ 100 Movies 100 Family Conversation 30 Dinning Out 440 Holidaying 125 Total $ 795

Product/Service Entertainment Activity driver is used for allocating activity costs to the product/service E.g.: Percentage, Time, etc. Activities Watching TV $ 100 Movies 100 Family Conversation 30 Dinning Out 440 Holidaying 125 Total $ 795 Activity Driver

Product/Service Entertainment $ 50 Allocating 50% of watching TV cost to entertainment Activities Watching TV $ 100 Movies 100 Family Conversation 30 Dinning Out 440 Holidaying 125 Total $ %

Product/Service Entertainment $ 424 (50+374) Allocating 6/7th(i.e. ~85%) of dinning out cost to entertainment Activities Watching TV $ 100 Movies 100 Family Conversation 30 Dinning Out 440 Holidaying 125 Total $ %

Product/Service Entertainment$ 679 ( ) Allocating all other activity costs directly to entertainment Activities Watching TV $ 100 Movies 100 Family Conversation 30 Dinning Out 440 Holidaying 125 Total $ %

Mr. Sam, Your entertainment expenses are $ 679 and not $ 500 WOW!!!! Its Absolutely Great … Can you tell me more on this concept ?

Sure….., In ABC costs flow through activities i.e. from Resources Activities Cost Objects It means two stage methodology is followed in allocating various costs to products/services.

Absolutely right... Mr. Sam Ok… Can you define Cost Object ? What actually does it refer to ?

Cost Object can be any customer /product /service /contract / project or other work unit for which separate cost measurement is required Ok…, it can be a delivery channel or an aspect like entertainment or any damn thing for which cost is to be determined.

Yes, Mr. Sam, Based upon the Cost Object definition, activities are defined And related resources are defined, which can be used for calculating cost of cost object defined

Mr. Sam, Cost allocation at each stage is done using a driver Is it Resource Driver and Activity Driver, which you are referring in the case

Yes, Mr. Sam, Resource driver is used in allocating resource cost to activities. For example allocating 100% of cable charges to watching TV activity Ok…. Activity driver is used in allocating activity costs to various Cost Objects. Am I Right?

Absolutely Right... Mr. Sam, That’s it. This is all about ABC. From here on management has to take the lead by analyzing costs Ok… Activity analysis is done to see which activity is costing more? Why is it so? Etc, such questions can be answered.

Mr. Sam, I Think from here onwards you can explain better than me the so called Activity Based Management(ABM) Ok… Thanks for giving me a clear picture on ABC concept and how one can use it for effective decision making. Bye……..