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Activity Based costing system

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Re: Activity Based costing system

Post by Shubham Mathur on Sat Dec 31, 2016 3:51 pm


In my opinion activity based costing is more relevant as per accounting or as per managerial terms.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 kshipra on Sat Dec 31, 2016 3:51 pm

Activity-based costing determines all activities associated with production, assigns a cost to those activities and then determines the cost of the product.
Traditional costing 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 accurate and preferred over the TCA because it takes important factors into account before assigning a cost to a product.
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.

1. Traditional cost accounting is obsolete whereas Activity Based costing 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.


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Re: Activity Based costing system

Post by salonimaheshwari31 on Sun Jan 01, 2017 9:52 pm

In my opinion 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. 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 Komal Khanna PGFA1623 on Mon Jan 02, 2017 7:25 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. 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. 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.
But, Activity-based costing methods improve the overhead costs associated with both the cost and cause, making it a much more flexible accounting option.

Summary:
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 Prateek Poddar on Wed Jan 04, 2017 1:31 am

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 sonali gupta on Wed Jan 04, 2017 7:10 am

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 hitesh kriplani on Wed Jan 04, 2017 9:12 am

In older days, businesses used what's now known as the Traditional Costing System. This system assigns manufacturing costs to a product based on the volume of materials, direct labor and direct machine hours needed to manufacture that product.

Activity-Based Costing (ABC) in his method of costing, an activity is anything to do with making the product, not just the machinery.

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.
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.

Activity-based costing methods improve the overhead costs associated with both the cost and cause, making it a much more flexible accounting option.
Traditional costing methods don't include the manufacturing costs involved in producing the product, therefore not giving an accurate cost guide

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Re: Activity Based costing system

Post by ABHISHEK SINGH.1605 on Wed Jan 04, 2017 9:27 am

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

DIFFERENCE BETWEEN ACTIVITY BASED COSTING AND TRADIONAL 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 Ankur Parwal on Wed Jan 04, 2017 11:59 am

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. 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. 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.
But, Activity-based costing methods improve the overhead costs associated with both the cost and cause, making it a much more flexible accounting option.

Summary:
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 Aman Chouhan on Wed Jan 04, 2017 12:04 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 PGFA1658 on Wed Jan 04, 2017 12:07 pm

yes.
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 kaushalsoni139 on Wed Jan 04, 2017 8:12 pm

In the field of accounting, activity-based costing and traditional costing are two different methods for allocating indirect (overhead) costs to products.
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.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.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.
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.
Thus we can say that ABC method of costing is better.
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Do you think Activity based costing system is better than Traditional costing System

Post by abhay.jain.18j on Wed Jan 04, 2017 8:18 pm

Yes, activity based costing is a much better than Traditional costing system because:
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.
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 Mubarak on Wed Jan 04, 2017 10:31 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 himanshu goyal on Wed Jan 04, 2017 10:36 pm

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 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 Simran Pipariya on Sat Jan 07, 2017 12:09 am

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.
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 some 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 non manufacturing expenses or determine which overhead costs actually affect specific products.

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Re: Activity Based costing system

Post by Kunwar Kartikay on Sun Jan 08, 2017 1:37 pm

In accounting, activity-based costing and traditional costing are two different methods for allocating indirect costs to products.Both methods estimate overhead costs related to the production and then assign these costs to products based on their cost-driver rate.ABC is more complex and more accurate than traditional costing.Traditional costing is more simplistic and less accurate than ABC, and typically assigns overhead costs to products based on an arbitrary average rate.
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.
Traditional costing systems can also result in significant under-costing and over-costing.
Hence, I can say Activity Based costing is much better then Traditional Based costing.


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Re: Activity Based costing system

Post by Rhythm on Tue Jan 10, 2017 7:27 pm

Costing systems helps companies determine the cost of a product related to the revenue it generates. Two common costing systems used in business are traditional costing and activity-based costing.
> Traditional costing assigns manufacturing overhead based on the volume of a cost driver, such as the amount of direct labor hours needed to produce an item. A cost driver is a factor that causes cost to incur, such as machine hours, direct labor hours and direct material hours.
> Activity-based costing allocates the costs of manufacturing a product according to the activities needed to produce the item. Managers should understand the advantages and disadvantages of both systems to meet the needs of their business.

Activity-based costing provides-
+ a more accurate view of product cost, but companies typically use it as a supplemental costing system.
+ It determines every activity associated with producing an item and allocates a cost to the activity. The cost assigned to the activity is then assigned to products that require the activity for production.
+ Greater costing accuracy is the primary benefit of activity-based costing. Companies assign cost only to the products that require the activity for production.
+ This method eliminates allocating irrelevant costs to a product.
+ It provides an easy interpretation of cost for internal management, the ability to enable bench-marking and a greater understanding of overhead costs.

> Implementing an activity-based costing system within a company requires substantial resources. 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.
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Re: Activity Based costing system

Post by Mohini Choudhary on Wed Jan 11, 2017 11:13 pm

Yes according to me ABC system is better then traditional costing because in ABC, there is a need to find out the actual overhead activities performed on the component. Each overhead activity is measured in terms of its cost driver i.e. how many units of that cost driver were actually used by the component. On each overhead activity, the total cost of that overhead activity is collected at the organizational level. This is called the overhead cost pool of that activity. Also, unit cost of each activity driver is worked out by dividing the total overhead cost pool of that activity by the total units of the cost driver used at the organizational level.This gives the actual cost per unit of the cost driver of that activity. Now, by multiplying the units of cost driver actually used by the component by this cost driver rate, one can get the actual cost of that overhead activity performed on the component. The overhead cost is allocated, in this manner, to the component for all the overhead activities the component used.In summary, in ABC, each overhead activity has a overhead cost pool at the organizational level, each overhead activity has a cost driver with its unit of measurement and each cost driver has its unit cost i.e. the cost driver cost.In this way ABC improves product costing procedure (as compared to traditional costing) because it recognises that many so-called fixed overhead costs vary in proportion to changes other than production units. By establishing the link between these cost drivers and fixed overhead costs, they are finally traced to individual products. But in some situation traditional costing is better.

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Re: Activity Based costing system

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