WEEK 4 Discussion 1 Tradional And Activity Based Costing
Business Finance
Discussion 1: Activity Based Costing
Activity Based Costing
Please respond to the discussion following question. Your response should fully address all elements of the question and be a minimum of 200 to 300 words long.
What are the differences between a traditional cost accounting system and an ABC cost accounting system? ABC systems are always more accurate than traditional accounting systems. Do you agree with this statement or not? Explain.
RESPOND TO TWO PEERS POST IN 100 WORD COUNT
(1) By Tieya Willis
Two ways of calculating the cost of something are a traditional cost a accounting and ABC systems. These are two very different ways of calculating. The traditional system is simpler and less expensive to implement. It is typically less accurate than the ABC system because it uses a single overhead pool. It is not a true figure but it adds a predetermined rate to the base cost of a product. It is best used when a company has low overhead costs in production.
ABC methods are more accurate butler complicated and costly to implement. They can take into account many different factors such as the many different costs of production, packaging, hours needed for production, shipping and extra. It is often complicated to assign a cost to each aspect of the manufacturing process and it is not the same for every product. Manufacturing overhead can change as the vendors used for every step of the process can change costs. This will in turn change the over head costs to make the product. Also, ABC systems are only as accurate as the information that is used in them. In my opinion, a company should really consider whether the cost and effort of using an ABC system is necessary for their business. The traditional method may be good enough.
(2) BY Keith
Cost Accounting:
It is a process of recording classifying and analyzing the total cost of products and the cost of each unit. It helps the companies to determine which product need to produce more, what will be the right price of that product and how many units should produce. There are two methods i-e traditional and activity-based costing method to allocate indirect or overhead cost to the manufacturing products. These have some similarities as well as some differences.
Differences between traditional and ABC cost accounting:
Traditional cost accounting is a simple method to evaluate the indirect cost of products. It uses a single overhead pool. It cannot calculate the true cost. It adds an average overhead rate to the direct cost of manufacturing products or it applies an indirect cost to the products on the basis of the predetermined rate. In this method, the overhead rate is applied on the basis of a number of hours labor worked for making a product (cost driver). It is used when a company has low overhead cost in contrast to the direct cost of production. It is an inexpensive but less accurate method for companies while ABC is complex but more accurate than traditional cost accounting. It assigns indirect costs to the activities first then to the products on the basis of products’ usage of the activities.
Yes, I agree with the statement that ABC method is more accurate than traditional cost accounting because it provides the information related to overhead cost more precisely and it not only increases the understanding of cost drivers and overhead cost but also highlights non-value adding activities too. It helps managers in taking more accurate pricing decisions.
