Short Essay - Chapter 4 Please upload or write your short essay here. Content, g

Question

Short Essay - Chapter 4 Please upload or write your short essay here. Content, grammar, punctuation, and citation will be graded. Short essays must be at least 500 words. Answer in multiple paragraphs. 1) What are the differences between Activity-Based Costing (ABC) and Traditional Product Costing? Give examples of each type of costing 2) If you were to have a business that produced products, what type of costing would be best for you? This is a personal preference...no right or wrong answer. What type of product would you want to sell?

Explanation / Answer

1. Solution

Traditional Overhead costing used Single overhead pool to calculate the cost per unit of the product. The entire cost was charged on the basis of Labour hours or Machine hours and hence it did not show the correct picture of the per unit expenses. Traditional based costing was used after all the products were produced and the total cost was divided by the number of units of the product. Traditional Overhead costing was used long back by the companies to define the total cost of the product.

ABC Costing was used as a cost driver where the cost was charged on the basis of individual activities. It was used where there were large number of products and the cost for each product was charged on the basis of the particular product in relation to its cost. For Eg. for Machinery related products, the cost for machine was divided by number of machine products or for labour related products, the cost was divided by number of labour hours. Likewise for each individual expense, there was a separate cost driver and then the total cost was arrived after adding the individual costs. ABC Costing method has now been introduced in all the companies and the traditional system has been done away with. ABC Costing has helped a lot for decision making and arriving at the proper cost of the product. It is a more systematic way to calculate the cost as the cost is distributed amongst its respective products or hours or etc.

Example for Traditional based costing can be where the Firm which manufactures Automobile parts, the total cost is directly divided to the parts manufactured and not on the basis of individual parts

Example for ABC can be the Banking sector where the cost was charged on the basis of number of transactions and where traditional costing cannot be applied since cost is charged with respect to the services provided and the level of transactions in them

2. If i were to do business myself i would definitely go for ABC costing as it shows a clearer picture of the cost allocated and the profit arrived would be fundamentally also correct, taking into account the respective cost for each product or service. If i were a manufacturer, i would have preferred to work in the textile industry and manufacture different varities of clothes. Also, with ABC costing, it would have been also possible to allocate the cost to separate varities of materials and clothes.

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