Activity-Based Costing Research Project

COST AND MANAGERIAL ACCOUNTING

▪ Field of Study: Management Accounting

▪ Name and Surname: [Add your name]
▪ Index Number: [Add your index number]

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 Title Page

Project Title: Exploring the Possibilities of Implementing Activity-Based Costing (ABC) in

Procter & Gamble (P&G)
Group Members:

1. Name and Surname - Index Number

2. Name and Surname - Index Number
3. Name and Surname - Index Number
4. Name and Surname - Index Number

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1. Theoretical Part: Description of Activity-Based Costing

1.1 Introduction to Activity-Based Costing (ABC)

Activity-Based Costing (ABC) is an advanced costing methodology that allocates overhead

costs based on the actual consumption of resources by different products or services. Unlike
traditional costing methods, which distribute overhead based on broad averages (e.g., direct
labor hours), ABC assigns costs by first identifying key activities within an organization and
determining the cost drivers for those activities. This method provides a more accurate
reflection of the true costs associated with products or services.

ABC helps organizations make better-informed decisions by enabling them to identify

inefficiencies, reduce waste, and optimize resource allocation.

1.2 Important Definitions and Functions of ABC

• Activity: Any task or operation performed within the organization that consumes
resources (e.g., machine setups, product inspections, or customer service calls).
• Cost Driver: A factor that causes the cost of an activity to increase or decrease.
Examples include machine hours, labor hours, or the number of orders processed.
• Overhead Costs: Indirect costs such as utilities, rent, and administrative expenses that
are not directly attributable to specific products or services.

1.3 Principles of Operation

1. Identifying and classifying activities: Identifying all activities performed in an

organization, such as production, marketing, and distribution.
2. Assigning resources to activities: Allocating resources like labor, materials, and
equipment to these activities based on their usage.
3. Allocating costs to products or services: Using cost drivers to allocate activity costs
to specific products, services, or departments according to their actual consumption.

1.4 Functions of ABC

• Enhancing Cost Accuracy: Provides a more accurate allocation of overhead costs,

allowing better insights into product costs.

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 • Supporting Strategic Decision-Making: Helps in pricing decisions, product line
profitability analysis, and resource optimization.
• Identifying Inefficiencies and Wasteful Activities: Unveils areas where processes
can be improved, reducing unnecessary costs.

2. Practical Part: Possibility of Using Activity-Based Costing in

Procter & Gamble (P&G)

2.1 Presentation of the Selected Organization

Procter & Gamble (P&G):

Founded in 1837, P&G is one of the largest multinational consumer goods companies in the
world, specializing in health, beauty, and home care products. Some of its best-known brands
include Tide, Pampers, and Gillette. P&G operates in over 180 countries, serving a wide array
of consumer needs, from laundry detergents to personal hygiene products.

• Industry: Consumer Goods

• Market: Global, with significant presence in the Americas, Europe, and Asia
• Customers: Retail consumers, businesses, and healthcare providers
• Short History: Originally a soap and candle manufacturer, P&G has evolved into a
leading player in the global consumer goods sector with an extensive product portfolio
and numerous iconic brands.

2.2 Possibilities of Implementing ABC in P&G

Implementation Potential:

P&G can benefit greatly from adopting ABC due to its wide range of products, diverse
geographic operations, and large-scale manufacturing processes. Some key areas where ABC
could be implemented include:

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 • Product Line Costing: ABC can be used to determine the true cost of each product
line, such as Tide or Pampers, by assigning costs to the activities involved in
production, packaging, and distribution.
• Regional Operations: P&G operates across various regions with distinct cost
structures. ABC can identify region-specific cost drivers (e.g., labor costs,
transportation expenses) to optimize resource allocation and increase profitability.
• Marketing Activities: With ABC, P&G could more accurately allocate marketing
expenses like advertising, promotions, and events, improving the return on investment
for each campaign.

Cost Allocation Comparison (Traditional vs. ABC)

Activity Traditional Costing ABC Costing

Manufacturing Based on direct labor Based on machine hours and labor hours
hours
Packaging Allocated evenly across Based on units produced and packaging
products complexity
Logistics Allocated by distance or Based on actual transportation hours and
volume shipping frequency
Marketing General allocation based Based on advertising hours and targeted
on sales campaigns

2.3 Benefits of ABC for P&G

• Accurate Product Costing: ABC allows P&G to better understand the profitability of
each product by accurately allocating indirect costs.
• Enhanced Decision-Making: Provides more detailed insights into cost structures,
aiding in pricing decisions, product line management, and cost reduction strategies.
• Cost Optimization: Identifies cost-saving opportunities by revealing inefficiencies in
production and logistics.

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Cost Drivers Contribution:

Activity Cost Driver Cost (USD)

Manufacturing Machine hours 50,000
Packaging Units produced 30,000
Marketing Advertising hours 20,000
Logistics Distance travelled 25,000

Graphical Presentation:

Percentage Contribution

Marketing
16%

Manufacturing
40%
Logistics
20%

Packaging
24%

Manufacturing Packaging Logistics Marketing

2.4 Challenges in Implementing ABC

• Complexity: The implementation of ABC in a large organization like P&G involves

considerable resources, time, and training.
• Data Collection: Accurate data for cost drivers must be collected and maintained,
which can be resource-intensive.
• Resistance to Change: Employees may resist adopting new costing methods,
especially when traditional costing has been in place for years.

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Benefits vs. Challenges

Benefits Challenges
Accurate product costing High implementation complexity
Enhanced decision-making Data collection difficulties
Cost-saving opportunities Resistance to change

2.5 Impact on Daily Operations

• Process Improvements: ABC can identify areas where inefficiencies exist, allowing
P&G to streamline operations and reduce waste.
• Management Efficiency: Managers can make better resource allocation decisions and
control departmental budgets more effectively.
• Enhanced Transparency: ABC enables clearer visibility of where money is spent,
improving accountability across departments.

3. Summary and Conclusions

Activity-Based Costing provides Procter & Gamble with an excellent opportunity to enhance
its cost management practices. By implementing ABC, P&G can improve its product costing
accuracy, identify cost-saving opportunities, and optimize its global operations. While
challenges such as complexity and data collection exist, the long-term benefits of enhanced
decision-making and better resource allocation make ABC a valuable tool for P&G’s future
growth.

4. References/Bibliography

1. Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to
Drive Profitability and Performance. Harvard Business School Press.
2. Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
3. Procter & Gamble Official Website: https://www.pg.com
4. Journal Articles on ABC from Management Accounting Research.
5. Articles on Activity-Based Costing from https://www.accountingtools.com

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