Question

Which method;  activity-based costing (ABC) or traditional costing do you think is a better approach to costing and why? Be sure to include in your discussion how you think the method you selected is helpful to managers and would benefit the company as a whole.  

Answer 1

If we are Comparing, Activity Based Costing and Traditional Costing, the only difference is at Manufacturing Overheads Allocation. Under Traditional Costing, Manufacturing Overheads allocated to direct costs of manufacturing products based on Average Overhead Rates Whereas under Activity Based Costing, manufacturing overheads applied using Cost Drivers (ex: Number of Labor Hrs required etc.) Traditional Costing used when there is Low overhead Costs compared to the Direct Cost of Production. Under these conditions we get reasonably accurate cost figures when the production volume is large, changes in overhead costs do not results material differences while calculating the cost of production. And Cost of Implementing Traditional Costing System is very low when compared with the Activity Based Costing. Under Activity Based Costing, it identifies related manufacturing costs incurred to each product specifically. It means every product shall not require all overhead costs and some product requires excess support of overhead costs and another product requires lower overhead Costs. Activity based costing uses Activity Drives based on those drives, activity rate calculated and applied to product using number of activities used to manufacture that particular product. Activity Based Costing Results high accurate figures of Manufacturing Cost of a particular product. It is used when there are different types of product manufactured and different activities involved (ex: tailor made products) Implementing Activity Based Costing requires highly professional knowledge and requires more cost to implement when compared to Traditional Costing System.