A method facilitating in conveying expenditure to each component of organization is termed as costing. The main purpose of this report is to appraise the two approaches used by the companies that is Activity Based costing and traditional costing. An effective costing system is the one which can minimize the waste using the information given by the system. Hence to obtain absolute benefits of the resources it should be used cost-effectively.
In this costing approach cost is allocated as per activity basis and therefore product cost is indistinct. According to this approach cost is incurred on its manufacturing when a product is manufactured. The approach followed is not completely valid since these theories not extent to work which are not completely related to the product.
Main difficulty with this method is, it consigns expenses completely to the product. This theory does not have many indirect cost pools for each branch. In traditional costing, expenses are initially related with cost centers afterwards to products.
This accounting method assigns cost to activities and not to a particular product or services. ABC method takes operating expenses, utilization of resources and productiveness of resources is obtained from the information system of the company which is collectively by the management. This approach was formed with the purpose to decipher troubles dealed in traditional costing approach (Innes, Mitchell and Sinclair, 2000). Traditional costing approach allocates cost on the averaging basis which is altogether different in ABC since overhead are allocated by forming a liaison between cost and its related activity.
Both methods are uniformly significant for analyzing product cost. ABC is used as an alternate to traditional costing. The significance of ABC is to examine the non value adding products and other supporting activities. The main purpose of using this method is it reduces the cost, develop the process and other activity’s based on precedence. ABC can be useful in every organization. Such as entity can assign its advertisement cost straightly to product where cost is used and hence providing a accurate image in comparison to traditional costing. Hence it can be said that company should adopt Activity based costing for better presentation.
Cohen, S. Venieris, G. Kaimenaki, E. (2005). ABC: adopters, supporters, deniers and unawares. Managerial Auditing Journal. Vol. 20. No. 9. pp. 981- 1000.
Innes, J., Mitchell, F., & Sinclair, D. (2000). Activity-based costing in the UK’s largest companies: a comparison of 1994 and 1999 survey results. Management accounting research, 11(3), 349-362.
Kaplan, R. S., & Anderson, S. R. (2003). Time-driven activity-based costing.
Turney, P.B., (1992). Activity based costing. Management Accounting Handbook”(4 th Edition), edited by C. Drury, Butterworth-Heinemann and CIMA.
Cooper, R. (1992). Activity-Based Costing. In Handbuch Kostenrechnun. Gabler Verlag.
Cooper, R., & Kaplan, R. S. (1992). Activity-based systems: Measuring the costs of resource usage. Accounting Horizons, 6(3), 1.
Drury, C. (1992). Activity-based costing. In Management and Cost Accounting. US.
Gosselin, M. (1997). The effect of strategy and organizational structure on the adoption and implementation of activity-based costing. Accounting, organizations and society, 22(2), 105-122.
Ittner, C. D., Lanen, W. N., & Larcker, D. F. (2002). The association between activity?based costing and manufacturing performance. Journal of accounting research, 40(3), 711-726.
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