ABC Cost Method
Activity-Based Costing (ABC) method is a calculation technique that was initially developed to enhance the profitability of products and selection of manufactured products optimal mix. This costing method can be defined as a technique that entails allocating manufacturing overhead costs to goods using a more logical approach. In this case, the technique first allocates costs to activities that are the actual causes of overhead. Once this is carried out, the activity-based costing then allocates the cost of those activities only to products that require the activities. The method involves cost allocation and decision making since it was developed to incorporate long-term planning components and forecasts (Dorin & Diaconescu, 2014, p.111).
Activity-Based Costing differs from traditional costing methods because cost allocation involves the use of a more logical approach. In essence, ABC cost entails a more logical means of assigning costs unlike traditional costing methods where costs are assigned depending on machine hours. Secondly, ABC method differs from traditional costing methods in the sense that cost allocation is determined on the basis of activities linked with production whereas traditional costing methods assign costs depending on an average overhead rate.
Given its differences with traditional costing methods, ABC method has several advantages and disadvantages. The disadvantages...
On the other hand, the disadvantages of ABC method include limited benefit if overhead costs account for a small portion or volume related, difficulties in assigning all overhead costs to certain activities, difficulties in justifying costs, and complexities in providing stakeholders' explanations.
Traditional Costing Methods
Traditional costing methods are some costing systems that are utilized in determination of a product's cost relative to generated revenue just like ABC method. However, traditional costing methods are defined as costing systems that allocate manufacturing overhead costs depending on the volume of the cost-driver or machine hours. For instance, traditional costing methods can allocate costs based on the labor hours required for the production of a specific item. The use of these factors in assigning costs is because these factors i.e. machine hours have direct impact on costs incurred during production. As a result, traditional costing methods played a crucial role in managerial decisions through offering operational aspects of cost and efficiency (Utku, Cengiz & Ersoy, 2011, p.318).
As evident in this definition, traditional costing methods differ significantly from ABC method,…
Even the lowest-level managers and employees are empowered to make decisions and have that valued democratic voice. ADVANTAGES: An advantage of this form of measurement is that it tends to be more encompassing, since it accounts for all uses of capital. It is susceptible to manipulation by managers with a short-term focus, or by manipulating the hurdle rate used to evaluate divisions. The frequently occurring problem, in concern to a lack
Absorption costing is a costing method which treats all costs of production as product costs without considering whether these costs are variable or fixed (AccountingforManagement, 2013). Under the absorption costing method the cost of a unit product comprises direct materials, direct labor, and both variable and fixed overhead. This costing method allocates a portion of fixed manufacturing cost to each unit of a product along with the variable manufacturing cost
Another example of pure job costing is web development, where the processes themselves vary hugely from project to project, meaning the cost and time involved also varies. Response Dosch & Wilson (2010) do seem to do a good job of defining job and process costing, and the person who posted this seems to have understood these definitions fairly well in the abstract -- that is, the definitions provided seem reasonable and
Joint costing systems should bear in mind the legal constraints on the use of such systems, and should provide accurate information to managers in order to be most useful in the managerial accounting context. Firms need to remain competitive, which indicates that the market will set prices to some degree. This implies that firms can make better decisions with respect to what projects/products they wish to pursue by understanding the
In a situation where the profit margin can vary greatly between customers that are charge the same price, increased transparency of costing will empower the company to adapt their pricing system so that costs could be more effectively recouped in the way the contracts are negotiated (O'Guin, 1992). Activity-based costing allows for the different stages of a process (the activities) to be costed in an effective manner, including costs
competing cost accounting approaches and explores best practices implemented in different countries. The essay examines traditional cost accounting (CA), activity-based costing (ABC), Grenzplankostenrechnung (GPK), throughput accounting (TA) and resource consumption accounting (RCA). Tradeoffs Between Cost Accounting Systems Comparing traditional costs systems and ABC shows that there are tradeoffs between cost and usability. The traditional cost system is typically both easy and inexpensive to implement; however, the information obtained from the system