Difference Between Traditional Costing And Activity Based Costing

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Team Reflection Week three was a challenging week. It covered the differences between traditional costing and activity-based costing as well as the steps in developing an activity-based costing system. The studies included the benefits and limitations. It also identified the differences in value-added and nonvalue-added activities. Team members struggled with some topics, but others came a bit easier. Traditional vs. Activity-Based Costing Traditional costing systems use a single, volume-based cost driver. Traditional costing system assigns the overhead costs to products based on their relationship to direct labor. Today, however, automation has changed the direct labor and sometimes traditional costing is lopsided. Activity-based costing is a secondary method which allocates overhead to activity cost pools and related drivers. Companies choose cost drivers based on casual relation, and benefits received, and reasonableness or fairness. Most cost drivers are related either to the volume of production or to the complexity of the production or marketing process. Activity-Based Costing Steps Activity-based costing assigns overhead to several activity cost pools and assigns the activity cost pools to products and services by means of cost drivers (Weygandt, Kimmel, & Kieso, 2010). According to Weygandt, Kimmel, and Kieso there are four steps to developing an activity-based costing system. Management must classify and organize the key activities and assign overhead costs to the applicable cost pools. The next step is to determine the cost driver or drivers that have the most impact. A cost driver according to Weygandt, Kimmel, and Kieso is any issue or action that has a direct association between the resources spent. The d... ... middle of paper ... ... overhead costs in their grocery store. Evaluating sales versus direct labor costs can help predict if the company should hire new associates or increase associate hours to handle store volume. The company can also analyze overhead costs to determine where the company can improve upon utilities and maintenance for the facility. Strategic decision-making and improving profitability depend on a company’s ability to improve sales or reduce costs. Conclusion In week three, the team learned about activity-based costing method. The team overall, mastered most of the concepts. There were some minor confusing points. By the end of class, most of the objectives were understood, and the team was ready to build. Chapters five, six, and seven were confusing. The team understood some of the information, and hopefully the class discussion will add to that understanding.

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