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Activity Based costing system

Post by bhupendra.hada on Tue Dec 27, 2016 3:46 pm

Do you think Activity based costing system is better than Traditional costing System

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Re: Activity Based costing system

Post by prerna khandelwal on Thu Dec 29, 2016 10:21 pm

Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs.

Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products.

The activity-based costing system is far more accurate in determining the cost of a product due to the inclusion of all needed equipment and labor necessary for producing the product. While the traditional accounting system is often used, it has significant weaknesses when figuring total costs. When using the activity-based method of costing, a manufacturer has a more accurate picture of what it costs to make each product. This allows an easier interpretation for internal management to base decisions on. Activity-based cost systems also provide a better understanding of the overhead costs involved in making the product.

Traditional costing methods don't include the manufacturing costs involved in producing the product, therefore not giving an accurate cost guide. However, the traditional method is used most often. External financial statements utilize the traditional method to provide a value of the cost of goods. However, using only the traditional cost method can lead to detrimental management decisions since it excludes the full cost of manufacturing the product. Good business standards entail use of both methods, so financial management can see the exact cost of producing each item the plant manufactures, including labor, utilities and all other costs involved. Activity-based costing methods improve the overhead costs associated with both the cost and cause, making it a much more flexible accounting option.

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Re: Activity Based costing system

Post by Karishma kedia on Thu Dec 29, 2016 10:27 pm

Yes, Activity Based Costing system is better than Traditional Costing system. Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. It is time-consuming but it is also more thorough and considers non-manufacturing expenses as well, such as administrative and managerial costs. But Traditional costing is a much easier way of determining the cost of a product, since it relies only on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in non-manufacturing expenses or determine which overhead costs actually affect specific products. In other words, Traditional costing negates other cost drivers that may contribute to the cost of an item and this can lead to bad management decisions.

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Re: Activity Based costing system

Post by ashi gupta on Thu Dec 29, 2016 11:13 pm

Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs.

Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products.

Activity-based costing should be used when accuracy is crucial, because it is the most precise. Although it is costly to implement, it should be used for:

1)Times when overhead is high, because small changes in each product cost can make a large difference overall. This method makes it easy to visualize and understand all indirect costs and activities.
2)Internal use, because decision-makers will be able to see all relevant spending and can document all indirect costs accurately. This method is good for finding areas of wasteful spending.

Traditional costing should be considered when time is limited or when accuracy won’t be affected much by production activities. Traditional costing is most effective for:

1)Times when overhead is low compared to the direct costs, because this is when it will be the most accurate. This works well when there are a large number of similar items (or a single item) being produced.
2) External use, because it will be easier for outsiders to determine the value of products.

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Re: Activity Based costing system

Post by Krishna Dhoot on Fri Dec 30, 2016 10:18 am

According to my opinion, activity based costing is more accurate than traditional based costing because it takes important factors into account before assigning a cost to a product.It’s also more thorough and considers non manufacturing expenses as well, such as administrative and managerial costs. Although it is costly to implement but, times when overhead is high, because small changes in each product cost can make a large difference overall this method makes it easy to visualize and understand all indirect costs and activities. Also, this method is useful for internal use as decision-makers will be able to see all relevant spending and can document all indirect costs accurately. This method is good for finding areas of wasteful spending. The biggest advantage of this method over traditional method is this method first assigns indirect costs to activities and then assigns the costs to products based on the products’ usage of the activities.
However, there are some of the limitations too for ABC costing as it is a bit more complicated and time-consuming. Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates.This can prove a disadvantage for companies with limited funds. Another disadvantage of using activity-based costing is that it is easily misinterpreted by some users.
Although the method of costing is also dependent upon the production of the companies.

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Re: Activity Based costing system

Post by maharwal.vartika on Fri Dec 30, 2016 10:34 am

In the field of accounting, activity-based costing and traditional costing are two different methods for allocating indirect (overhead) costs to products.

Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods. Traditional costing is more simplistic and less accurate than ABC, and typically assigns overhead costs to products based on an arbitrary average rate. ABC is more complex and more accurate than traditional costing. This method first assigns indirect costs to activities and then assigns the costs to products based on the products’ usage of the activities.
Traditional costing systems apply indirect costs to products based on a predetermined overhead rate. Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing is optimal when indirect costs are low compared to direct costs.
Activity based costing systems are more accurate than traditional costing systems because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more costly to implement. The leap from traditional costing to activity based costing is difficult.

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Re: Activity Based costing system

Post by Sheenajain on Fri Dec 30, 2016 12:37 pm

Activity based costing systems are more accurate than traditional costing systems because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more costly to implement. The leap from traditional costing to activity based costing is difficult.Traditional costing systems are simpler and easier to implement than ABC systems. However, traditional costing systems are not as accurate as ABC systems. Traditional costing systems can also result in significant under-costing and over-costing.

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Re: Activity Based costing system

Post by Aarya Gupta on Fri Dec 30, 2016 1:30 pm

Yes, Activity Based Costing is better than the Traditional Blanket Rate method, because the former focuses on each of the parameters and thus less cost is incurred on the overall process in comparison to the traditional system.

Activity-based costing determines all activities associated with production, assigns a cost to those activities and then determines the cost of the product.The other method is traditional costing, which assigns costs to products based on an average overhead rate. This method pools all indirect costs in production and applies those costs equally across the board using one appropriate cost driver, such as machine hours.
thus, due to this reason activity costing system is more accurate according to me, However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs.
Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products.
therefore, ABC method of costing is more appropriate in my opinion.

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Re: Activity Based costing system

Post by Megha Nagelia on Fri Dec 30, 2016 2:08 pm

Costing is used in business accounting strategies as a way of determining the cost of manufacturing a product in relation to the revenue generated by that product. Costing systems determine the overhead of production and then allocate those overhead costs to a business’ products.

There are two common methods for allocating these indirect costs to products. Both of these methods assess overhead costs and then attach these costs to products based on certain cost drivers. A cost driver is any component that costs money or any factor that is related to a cost occurring, such as the volume produced or the number of labor hours.

The first of these methods is activity-based costing, which is sometimes referred to as “ABC.” Activity-based costing determines all activities associated with production, assigns a cost to those activities and then determines the cost of the product.

The other method is traditional costing, which assigns costs to products based on an average overhead rate. This method pools all indirect costs in production and applies those costs equally across the board using one appropriate cost driver, such as machine hours.Traditional costing systems apply indirect costs to products based on a predetermined overhead rate. Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing is optimal when indirect costs are low compared to direct costs.

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Re: Activity Based costing system

Post by AYUSHI MISHRA on Fri Dec 30, 2016 2:19 pm

* Activity-based costing is an accounting method that identifies the activities that a firm performs and then assigns indirect costs to products.

* Traditional method of cost accounting refers to the allocation of manufacturing overhead costs to the products manufactured.


In my opinion

Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs.

Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products.

A simple example of these costing methods can be demonstrated with the costs of living in an apartment with roommates. Two roommates in an apartment will typically split the costs of rent, utilities and groceries, and they have a couple of options for doing so. They could simply total the cost of all of the bills and divide it exactly in two. This would be similar to traditional costing.

The roommates also have the option of determining who uses specific utilities and paying only for what each one uses. They can then create an itemized bill for each roommate. For example, if one roommate doesn’t use the internet and the other doesn’t use cable, they won’t have to pay those parts of the bill. This method is similar to activity-based costing.


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Re: Activity Based costing system

Post by sbagla21 on Fri Dec 30, 2016 4:32 pm

The activity-based costing system is far more accurate in determining the cost of a product due to the inclusion of all needed equipment and labor necessary for producing the product. While the traditional accounting system is often used, it has significant weaknesses when figuring total costs.
 
When using the activity-based method of costing, a manufacturer has a more accurate picture of what it costs to make each product. This allows an easier interpretation for internal management to base decisions on. Activity-based cost systems also provide a better understanding of the overhead costs involved in making the product.
Traditional costing methods don't include the manufacturing costs involved in producing the product, therefore not giving an accurate cost guide. However, the traditional method is used most often. External financial statements utilize the traditional method to provide a value of the cost of goods. However, using only the traditional cost method can lead to detrimental management decisions since it excludes the full cost of manufacturing the product. Good business standards entail use of both methods, so financial management can see the exact cost of producing each item the plant manufactures, including labor, utilities and all other costs involved. Activity-based costing methods improve the overhead costs associated with both the cost and cause, making it a much more flexible accounting option.
Difference between Activity Based Accounting and Traditional Costing
 
1. Traditional cost accounting is obsolete whereas Activity Based Accounting is used more by various target-oriented companies.
2. ABC methods help the company to identify the needs of keeping or eliminating certain activities to add value to the products.
3. TCA methods focus on the structure rather than on processes whereas ABC methods focus on the activities or processes rather than on the structure.
4. ABC provides accurate costs whereas TCA accumulates values arbitrarily.
5.  TCA is almost obsolete whereas  ABC methods are largely in use since 1981.

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Re: Activity Based costing system

Post by SHWETA KHANDAL on Fri Dec 30, 2016 6:50 pm

In the field of accounting,activity based costing and traditional costing are two different methods of allocating indirect (overhead)costs to products.Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate.Activity based costing systems are more accurate than traditional costing systems because they provide more precise breakdown of indirect costs.However,ABC systems are more complex and more costly to implement.The leap from traditional costing to activity based costing is difficult.Traditional costing systems are simpler and easier to implement than ABC systems.Traditional costing systems can also result in significant under-costing and over-costing.
Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product.However,for this same reason ,it is a bit more complicated and time-consuming.Traditional costing is a much more easier way of determining the cost of a product,since it relies solely on assigning average overhead rates.

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Re: Activity Based costing system

Post by yashica arora on Fri Dec 30, 2016 6:56 pm

In my opinion activity based costing is better because it is more accurate than traditional costing systems. They provide a more precise breakdown of indirect costs. When using the activity-based method of costing, a manufacturer has a more accurate picture of what it costs to make each product. This allows an easier interpretation for internal management to base decisions on. Activity-based cost systems also provide a better understanding of the overhead costs involved in making the product. TCA or Traditional Cost Accounting uses a single overhead pool and is not able to calculate the true cost. The costs of the objects are allocated randomly based upon the labor or machine hours etc. The ABC system is advantageous since it helps in simplifying the decision making process and it makes management concepts become clear and target -oriented. It also helps in evaluating performances and sets standards which can help the manager to use this information for comparison purposes.

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Re: Activity Based costing system

Post by Ravi Sharma on Fri Dec 30, 2016 7:29 pm

Yes, activity based costing is better because it is more accurate than traditional costing systems. They provide a more precise breakdown of indirect costs.Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. Traditional costing is a much more easier way of determining the cost of a product, since it relies solely on assigning average overhead rates.
The activity-based costing system is far more accurate in determining the cost of a product due to the inclusion of all needed equipment and labor necessary for producing the product. While the traditional accounting system is often used, it has significant weaknesses when figuring total costs. When using the activity-based method of costing, a manufacturer has a more accurate picture of what it costs to make each product. This allows an easier interpretation for internal management to base decisions on. Activity-based cost systems also provide a better understanding of the overhead costs involved in making the product.
Traditional costing methods don't include the manufacturing costs involved in producing the product, therefore not giving an accurate cost guide. However, the traditional method is used most often. External financial statements utilize the traditional method to provide a value of the cost of goods. However, using only the traditional cost method can lead to detrimental management decisions since it excludes the full cost of manufacturing the product. Good business standards entail use of both methods, so financial management can see the exact cost of producing each item the plant manufactures, including labor, utilities and all other costs involved. Activity-based costing methods improve the overhead costs associated with both the cost and cause, making it a much more flexible accounting option.

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Re: Activity Based costing system

Post by manish rajpal on Fri Dec 30, 2016 7:33 pm

In the field of accounting, activity-based costing and traditional costing are two different methods for allocating indirect (overhead) costs to products.
Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs.

Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products.
Activity-based costing should be used when accuracy is crucial, because it is the most precise. Although it is costly to implement, it should be used for:

1)Times when overhead is high, because small changes in each product cost can make a large difference overall. This method makes it easy to visualize and understand all indirect costs and activities.
2)Internal use, because decision-makers will be able to see all relevant spending and can document all indirect costs accurately. This method is good for finding areas of wasteful spending.

Traditional costing should be considered when time is limited or when accuracy won’t be affected much by production activities. Traditional costing is most effective for:

1)Times when overhead is low compared to the direct costs, because this is when it will be the most accurate. This works well when there are a large number of similar items (or a single item) being produced.
2) External use, because it will be easier for outsiders to determine the value of products.

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Re: Activity Based costing system

Post by ankitsharma on Fri Dec 30, 2016 8:01 pm

Yes, I think activity based costing system is better than Traditional costing System. Because, Activity Based Costing (ABC) is a system that goes beyond traditional cost price models with respect to indirect cost calculation models. This method was developed in the United States. Robert Kaplan is regarded as the founder of the theoretical principles of activity based costing within the ‘cost management’ knowledge area.

In traditional cost price systems such as the Cost Centre and surcharge methods, indirect costs are allocated based on volumes of products, for instance hours of labour and machine hours. The costs are not allocated to the cost drivers and there is no causal relationship. This makes it hard to determine the costs of the production factors and overheads as a result of which a distorted picture may be presented in terms of costs.

Unlike traditional cost price systems, activity based costing does establish a causal link between the cost drivers and indirect costs. By passing on this insight to the responsible cost drivers, a transparent and cost-conscious conduct is stimulated. The implementation of activity based costing can help employees to understand the different cost categories and to analyse activities that add value. This is also a way to find out what activities do not add value and should therefore be eliminated. In this manner improvements can be realized that can lead to higher performance results. It also contributes to strategic developments within cost price calculations. More accurate cost information can help an organization respond to competitive advantage and certain decisions in the Product Markt Matrix (PMM).

Activity based costing identifies cost groups of activity centres in organizations and allocates costs to products and services based on a number of events or transactions that are absolutely necessary in a process to deliver the product or service.
Introducing activity based costing is not a simple task: it is a long and rigorous process and it is certainly not “as easy as A, B, C”.
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Re: Activity Based costing system

Post by mayank khatri on Fri Dec 30, 2016 8:29 pm

It is a well-known fact that the traditional costing systems utilize a single, volume-based cost driver. This is the reason why the traditional product costing system distorts the cost of products. In most cases this type of costing system assigns the overhead costs to products on the basis of their relative usage of direct labour. For this reason traditional cost systems often report inaccurate product costs.

The problem is in the underlying methodology of the traditional costing systems. They adhere to the assumption that products cause cost. Each time a unit of product is manufactured, it is assumed that cost is incurred. This assumption makes sense for certain direct costs. The assumption does not work for activities that are not performed directly on the product units.


The underlying assumption of activity based costing is entirely different from that of conventional costing systems. The conventional costing system assumes that products cause costs. Activity based costing systems have activities as the fundamental cost objects. Activity based costing systems also assumes that activities cause costs and that cost objects create the demand for activities.

Activity based costing is a different approach and improves control of overheads by a cost/cause relationship, that are activity and cost. The system is flexible enough to relate costs to customers, processors, management responsibility and not just products.

As the name suggests, activity based costing is a system that focuses on activities as the basic cost objects and uses the costs of these activities as building blocks for compiling the costs of other cost objects. The use of an activity based costing system can also help a company to develop a way to analyse and justify manufacturing cycle-time improvements.

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Re: Activity Based costing system

Post by rakshita jain on Fri Dec 30, 2016 10:48 pm

in my opinion activity based costing is more relevant as per accounting or as per managerial terms.
In traditional cost accounting it is assumed that cost object consume resources whereas in ABC it is assume that cost object consume activities. Traditional cost accounting mostly utilize volume related allocation bases while ABC uses drivers at various levels.traditional cost accounting is structure oriented while ABC is process oriented.Activity-based costing should be used when accuracy is crucial, because it is the most precise. Traditional costing should be considered when time is limited or when accuracy won’t be affected much by production activities.Traditional costing systems are simpler and easier to implement than ABC systems. However, traditional costing systems are not as accurate as ABC systems. Traditional costing systems can also result in significant under-costing and over-costing. One of another disadvantage of solely using the traditional costing system is that it can lead to bad management decisions because it excludes certain non-manufacturing costs.Disadvantage of using activity-based costing is that it is easily misinterpreted by some users. From the above mention difference we can conclude that ABC is better than traditional.

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Re: Activity Based costing system

Post by prakhar.gupta on Fri Dec 30, 2016 10:53 pm

Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs.
Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products.
A simple example of these costing methods can be demonstrated with the costs of living in an apartment with roommates. Two roommates in an apartment will typically split the costs of rent, utilities and groceries, and they have a couple of options for doing so. They could simply total the cost of all of the bills and divide it exactly in two. This would be similar to traditional costing.The roommates also have the option of determining who uses specific utilities and paying only for what each one uses. They can then create an itemized bill for each roommate. For example, if one roommate doesn’t use the internet and the other doesn’t use cable, they won’t have to pay those parts of the bill. This method is similar to activity-based costing.

Which Should We Use?
Both forms of costing have various benefits as well as disadvantages. Determine which form of costing will be best suited for your project by considering your specific needs and your time frame.

Activity-based costing should be used when accuracy is crucial, because it is the most precise. Although it is costly to implement, it should be used for:
• Times when overhead is high, because small changes in each product cost can make a large difference overall. This method makes it easy to visualize and understand all indirect costs and activities.
• Internal use, because decision-makers will be able to see all relevant spending and can document all indirect costs accurately. This method is good for finding areas of wasteful spending


Traditional costing should be considered when time is limited or when accuracy won’t be affected much by production activities. Traditional costing is most effective for:
• Times when overhead is low compared to the direct costs, because this is when it will be the most accurate. This works well when there are a large number of similar items (or a single item) being produced.
• External use, because it will be easier for outsiders to determine the value of products.

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Re: Activity Based costing system

Post by Kiran Moolrajani on Fri Dec 30, 2016 11:26 pm

Yes, Activity-based costing is better than Traditional Costing Method because Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs.

Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products.

A simple example of these costing methods can be demonstrated with the costs of living in an apartment with roommates. Two roommates in an apartment will typically split the costs of rent, utilities and groceries, and they have a couple of options for doing so. They could simply total the cost of all of the bills and divide it exactly in two. This would be similar to traditional costing.

The roommates also have the option of determining who uses specific utilities and paying only for what each one uses. They can then create an itemized bill for each roommate. For example, if one roommate doesn’t use the internet and the other doesn’t use cable, they won’t have to pay those parts of the bill. This method is similar to activity-based costing.

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Re: Activity Based costing system

Post by sonakshi chadha on Fri Dec 30, 2016 11:35 pm

In the field of accounting, activity-based costing and traditional costing are two different methods for allocating indirect (overhead) costs to products.
Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods. Traditional costing is more simplistic and less accurate than ABC, and typically assigns overhead costs to products based on an arbitrary average rate. ABC is more complex and more accurate than traditional costing. This method first assigns indirect costs to activities and then assigns the costs to products based on the products’ usage of the activities.
Traditional Costing Method
Traditional costing systems apply indirect costs to products based on a predetermined overhead rate. Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing is optimal when indirect costs are low compared to direct costs.
Activity-Based Costing Benefits
Activity based costing systems are more accurate than traditional costing systems because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and costlier to implement. The leap from traditional costing to activity based costing is difficult.

In my opinion, Activity Based costing is a better option as compared to Traditional Costing Method.



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Re: Activity Based costing system

Post by priyanka sharma on Sat Dec 31, 2016 12:24 am

The difference between ABC or Activity Based Costing and TCA or Traditional Cost Accounting is that ABC is complex whereas TCA is simple. Activity Based Costing is accurate and preferred over the TCA cost management system. The ABC method of cost management system is adopted when the overheads of the company are high and there are large numbers of miscellaneous products. Inaccuracy or errors are most unwanted and undesirable because of the competitive rates set by the competitors in the market. Due to this heavy and stiff competition, a highly reliable and accurate method is required for the cost management.
Traditional Cost Accounting uses a single overhead pool and is not able to calculate the true cost. The costs of the objects are allocated randomly based upon the labor or machine hours etc. ABC costing includes identifiable products parts or labor whereas TCA arbitrarily accumulates expenses, salaries, depreciations etc.
Smaller targeted costs that are built upon activities are calculated with the help of the ABC system. The ABC system is advantageous since it helps in simplifying the decision making process and it makes management concepts become clear and target -oriented. It also helps in evaluating performances and sets standards which can help the manager to use this information for comparison purposes.
In the Traditional Cost Accounting System, the company determines the cost of production after the products have been produced whereas in the target or Activity Based Accounting System, the value or cost of the product is determined on the basis of customer feedback and pocket range. The ABC system helps the company to determine whether to lower or raise the activities cost to grab the consumers. The ABC system also helps in keeping up with the competitors without sacrificing the quality and the quantity of the products.


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Re: Activity Based costing system

Post by nikita0831 on Sat Dec 31, 2016 2:39 am

Activity based costing are more accurate than traditional costing system because they provide a more precise breakdown of indirect cost.

However both methods estimate overhead cost related to production and then assign these cost to products based on a cost driver rate. The difference are in the accuracy and complexity of the two methods. Traditional costing is more simplistic and less accurate than ABC , and typically assigns overheads costs to products based on an arbitrary average rate . ABC is more complex and more accurate than traditional costing. This method first assigns indirect cost to activities and then assigns the costs to products based on the products usage of the activities. One disadvantage of using activity based costing is that it is easily misinterpreted by some users. Although the method of costing is also dependent upon the production of the companies. Even traditional costing can also result in significant under – costing and over – costing.
Thus apart from certain limitations ABC costing is more appropriate in my opinion.

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Re: Activity Based costing system

Post by Neha Choudhary on Sat Dec 31, 2016 12:31 pm

The first method is activity-based costing, which is sometimes referred to as “ABC.” Activity-based costing determines all activities associated with production, assigns a cost to those activities and then determines the cost of the product.

The other method is traditional costing, which assigns costs to products based on an average overhead rate. This method pools all indirect costs in production and applies those costs equally across the board using one appropriate cost driver, such as machine hours.

Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers non manufacturing expenses as well, such as administrative and managerial costs.

Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in non manufacturing expenses or determine which overhead costs actually affect specific products.Activity-based costing should be used when accuracy is crucial, because it is the most precise while traditional costing should be considered when time is limited or when accuracy won’t be affected much by production activities.

Neha Choudhary

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Re: Activity Based costing system

Post by SWATI SRIVASTAVA on Sat Dec 31, 2016 3:41 pm

As per my opinion, activity based costing is better than traditional costing. This is because the underlying assumption of activity based costing is entirely different from that of conventional costing systems.

Fundamentally, traditional costing systems try to assign cost directly to products, rather than to activities first and then from the activities to product units. The typical cost report gives information on what is spent, but not why it is spent. It ends up with a cost of goods sold based on absorption costing and includes only product costs as defined in financial accounting.

But as the name suggests, activity based costing is a system that focuses on activities as the basic cost objects and uses the costs of these activities as building blocks for compiling the costs of other cost objects. The use of an activity based costing system can also help a company to develop a way to analyze and justify manufacturing cycle-time improvements. The system is flexible enough to relate costs to customers, processors, management responsibility and not just products.

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Re: Activity Based costing system

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