ABC and Traditional Product Costing Methods
Activity Base Costing hereafter referred to as ABC and Traditional Product Costing Methods are used for the sole purpose of utilizing cost information to make strategic decisions that affect fixed and variable. Even though ABC is used by manager for making strategic decisions, it is not used independently. It is utilized to supplement official costing systems that are used for preparing external financial reports. (Garrison, Noreen, & Brewer, 2010) In the Traditional Product Costing Method emphasis is put on absorption cost used by manufacturing companies to calculate unit cost for the purpose of valuing inventories and determining cost of goods sold for external financial reports. (Garrison, Noreen, & Brewer, 2010) Traditional Product Costing determines cost of goods sold by combining direct material, direct labor and manufacturing overhead. Having the accurate cost information assist manager in numerous ways to plan, control, and evaluate decisions. With the right information as a part of the planning process companies can determine whether it can or should compete in certain markets. Using the information to control operations a company can analyze relationship between production levels and costs determining whether to increase or decrease production levels of certain products. Furthermore this control data can help with future operations plans because it can determine if the increased costs of additional production would less than the revenue that would be derived from sales of the products. Finally the evaluation process allows the company can compare actual cost against budgeted cost and identify both progress and problems for subsequent management action. (Albrecht, Stice, Stice...
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Due to technology ABC has made this complex problem more feasible and provided an alternative to the traditional plantwide and departmental approaches to deining costs pols and selecting allocation bases. An activity in ABC is the event that cause consumption of overhead resources and the activity cost pool is the “bucket”. The allocation base is the acitivity measure.
Allocation bases driven by the volume of production is exclusively relied upon in the traditional costs system. On the other hand ABC has defined five levels that do not largely relate to the volume of units produced.
References
Albrecht, W. S., Stice, J. D., Stice, E. K., & Skousen, k. F. (2002). Accounting Concepts and Applications. Cincinnati: South-Western.
Garrison, R. H., Noreen, E. W., & Brewer, P. c. (2010). Managerial Accounting. New York: McGraw Hill/Irwin.
Reimers, Jane L. (2003). Financial Accounting A Business Process Application. Upper Saddle River, New Jersey, Prentice Hall.
Donal E. Kieso, Wegandt J. Jerry, Warfield D. Terry. (2012). Intermediate Accounting. Hoboken, NJ: Wiley.
Romney, Marshal, and Paul Steinbart. Accounting Information Systmes. 10th ed. Upper Saddle River: Pearson Education, 2006. 193-195.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
Cost allocation is the process of identifying, aggregating, and assigning of cost to various separate activities. There is no overly precise method of charging cost to objects, hence resulting to approximate methods being used to do so. Amongst the approximation basis used includes square footage, headcount, cost of assets employed, and electricity usage amongst others. The main aim of cost allocation is to spread cost in the fairest possible method and also to impact the behavior pattern of the cost.
Comparing two cost systems, the new system added two new cost pools based on the traditional one, which usually allocated support costs to material, labor and supported related cost pools. The old system did not reflect the increasing support costs of specialty products so that it was unable to reduce costs and provide a good choice for the plant on how to choose profitable orders. From our calculations (Exhibit 3), the new system transferred engineering costs and Administrative costs to order processing costs pool and special components cost pool similarly. It shows that the new system is more clear and efficient on cost reduced and al...
Cost control and management. The study also identifies several other advantages of using the ABC
There are two general approaches to allocating costs that are not direct costs associated with producing a product or rendering a service. These approaches are activity-based costing (ABC) and traditional costing. The former is effort-intensive but more accurate as it identifies the associated cost per activities involved in the production or service and used this information to assign the cost of the finished product or service. The latter, on the other hand, used an average rate that is derived from estimating a pooled indirect cost for a certain period (e.g. year-long time frame) and spread this cost to a chosen cost-driver parameter such as man-hours or machine-hours (“Difference Between Activity-Based Costing and Traditional
From the A12 redesign proposal, it shows that the current standard cost system is unable to link the reduction in the number of parts to activity reductions and cost savings. The labor-direct-based standard cost system reflects the cost of A12 is distorted. Using the ABC system, according to the activities of A12 allocate the overhead cost to A12 that could find that the current overhead cost of A12 was overstated by the standard cost system. At last, A12 Junction Box could be identified it is an attractive and profitable product, at the same time, it demonstrates the value of ABC.
Activity-Based Costing ( ABC ) Summary The business environment in the 1990s is markedly different from that of the past when conventional cost accounting procedures were established. Activity-based costing (ABC), pioneered in the late 1980s, offered a new costing approach consistent with the changed environment. However, ABC did not diffuse rapidly into the business community.
Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0. Retrieved from: https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=137
Besides, an organisation can adopt a technique of activity-based costing (ABC) as an approach to support its sustainability objectives. ABC system is a technique of assigning overhead costs to products and services by identifying the cost drivers. ABC technique will first identify each activity cost that is involved in the process of production, then assign the cost to each product and service on the basis of each activity consumption in the production of each product and service (Drury, 2012, p. 253). ABC system is an effective method to account for costs of products and services. This is because ABC system allocates indirect costs based on a cause-and-effect relationship (Drury, 2012, p. 269). ABC system allocates overhead costs to cost
Activity-based costing is used as a supplement of traditional cost accounting in a company to support manager in internal decision making. It focus on assigning the indirect cost to direct costs in order to get a more accurate cost on products. Activity-based costing uses several cost pools instead of one in traditional cost accounting. The system is easy to implement and it provides many benefits, it allows the company to respond to inefficiency by reallocating resources to more profitable activity from areas that absorb too many resources. It also allows the company to respond to manufacturing overhead cost and assumes a more accurate selling price on products in order to make more profits. Company that do not have internal expertise to conduct activity-based costing analysis may think to hire one or ask company that provides this kind of services for help.