Reflection: The Differences Between Traditional Methoding, Vs. Activity-Based Costing

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

Implementation is extremely expenses and once implemented it is costly to maintain. The company must collect, check, and enter data into the system. In addition, most managers are used to the traditional costing method and sometimes find it difficult. Finally, activity-based costing data can be easily misinterpreted which means that management must use it carefully when making decisions.

Value Added and Non-Value Added

The value a company adds to its products is what convinces the customers to buy them. According to Weygandt, Kimmel, and Kieso non-value-added activities increase costs to the product without improving the value. Value-added activities are activities that increase the worth or value of a product or service. These are activities that the customers consider essential. Non-value-added activities are activities that add cost or increase time in production, but does not add worth or value. Some members had some difficulty understanding the differences in value and non-value added costs.