The Traditional And Traditional Systems Of Costing Systems

Activity-based costing can be defined as the managers allocate costs depending on the quantity of resources a product or service consumed in the manufacture of goods and services. The activity based

Glaser Health Products manufactures medical items for the health care industry. Production involves machining, assembly and painting. Finished units are then packed and shipped. The financial controller is interested to introduce an activity-based costing (ABC) system to allocate (or distribute) indirect costs to products. Indirect costs, as distinct from direct costs, cannot be unambiguously linked to specific products. The controller would like to calculate product costs based on ABC for planning and control, not inventory valuation.

Under a traditional system, overhead cost is allocated to an activity based on hours or rates for direct labor or machine usage. However, this approach does not clearly indicate how much overhead cost will be needed in order to complete a job through a particular function. ABC methodology is to be used as an alternative to traditional accounting where a business 's overhead costs (indirect costs such as electrical energy consumption for heating or cooling, or indirect cost associated with marketing) are allocated as a proportion of direct costs, to an activity. This approach is unsatisfactory because there can be cases where two activities could absorb the same direct costs

An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx,

Typically, produce more diverse product entails more overheads and costs to the whole manufacturing process, for example, products which require more timing consumption in the production stage needs to assign more cost and overheads regarding other short-term production time product and incurrence more wages, electricity, storing, supplies .as such the firms required to assign more costs for the allocation base to these activities measured. In addition, some other cost driver influence another cost like the administrative and the selling costs. This charge would contribute in raise the total overheads cost insurance in the production. applying the activity based costing assist the organization to charge back these expenses for the consumer of the product.

Nowadays, we know that activity based costing system assigns overhead costs to products or services products that using a two-stage process, which focuses on activities. ABC is a relatively new and very important topic in managerial accounting. ABC allows us to find a way that we could determine the profitability of every product, profitability of every customer we serve, and the profitability of our process. Contents in brief, first that comparing potential advantages of ABC versus traditional costing methods. The

For external reporting, production costs must be assigned to products for both income and asset reporting purposes. For operational cost control, strategic decision making, and performance measurement purposes, however, many organizations also capture and assign costs from the other functions in the internal value chain. What methods are used to measure costs and profits across the value chain, and does their usage vary by function? We identified the most frequently used types of methods as: x Actual costing, x Normal costing, x Standard costing, and x Activity-based costing.

Activity Based Costing (ABC) is more relevant than traditional costing in companies, where product mix is diverse in; batch sizes, physical sizes, degree or complexity, and raw material characteristics. ABC will also provide more decision useful information for the service industry, characterized by diversity in range of services provided. If the products in a plant or services provided posses similar characteristics, wither volume based or an activity based cost driver will provide reasonably accurate costs. The strategic goal of ABC is to provide decision useful cost and profitability information for optimal pricing decisions, appropriate product mix, and

In today’s business world, there is much debate about the future of standard costing and the determination of the system becoming obsolete. With some academicians making it clear that this method is inappropriate in a modern manufacturing environment, many others are still using this system. These systems are designed to properly allocate costs of direct labor, indirect labor, materials, overhead, and selling/ general/administrative accounts on a unit basis for the purpose of accurately costing products and the subsequent control of those costs in managing the production, marketing, purchasing, and administrative functions of the business. Even though these systems are still widely popular and used for many US manufacturing firms there is still much controversy surrounding these systems in deciding if the systems are the most effective or are useless? In fact, since the early 1980s standard cost systems (SCS) have been under attack as not providing the information needed for advanced manufacturers (Hansen and Mowen, 2013). The explanation of this claim is that standard costing does not meet the needs of business because of the introduction of advanced manufacturing technologies, shorter product life cycles, decreasing emphasis of labor cost in the total production costs, and intense global competition. However, with 74 percent of respondents verifying that they were using standard costing systems still and that it is the best method out there as of right now, a

Traditional costing is an easily implemented costing method that aligns with generally accepted accounting principles, GAAP. Traditional costing is the distribution of manufacturing overhead costs across the number of products produced based or another volume based metric. Traditional costing is very simplistic in the fact that it doesn’t allocate out any nonmanufacturing costs. Traditional costing allocates costs to generic buckets such as direct material, direct labor and other overhead. Activity based costing (ABC) was developed as a costing method to overcome the weaknesses of traditional costing. ABC allocates costs to every activity, or manufacturing task, associated in the production of an item. ABC is more accurate than traditional costing. Competition Bikes grouped the following as tasks associated with the manufacturing of bicycles; Factory Setups, Quality Control, Engineering Service, Product Movements, Utilities, and Depreciation. (Johnson, n.d.)

Activity based costing (ABC) assigns processing overhead costs to products in a far more rational manner than the traditional methodology of simply allocating costs based on machine time. Activity based charging first assigns costs to the actions that will be the source of the overhead. After that it assigns the cost on those activities and then the merchandise that demand the actions.

The ABC costing system is a technique in cost management. Activity Based Costing aims to reduce costs while at the same time enhancing product quality. Managers use ABC to identify how resources uses cost differently and then determine areas which need continuous improvements. When a unit is produced, unit level activity is done. After a whole batch is doe every time, batch level activity is undertaken for the company. For effective production process, we allow facility sustaining activities in the company. Service industries consist of different services which take different levels of resources. The existence of regulation and stiff competition in the service industry do determine the costing system to be used in the

There are many concepts of cost in an organization. Costs also are used in different business applications, such as financial accounting, cost accounting, budgeting, capital budgeting, and valuation. Consequently, there are different ways of categorizing costs according to their relationship to output as well as according to the context in which they are used. Following this summary of the different types of costs are some examples of how costs are used in different business applications.

Activity-based costing, or ABC, is defined as “a total quality management tool for cost and performance measurement of activities, resources, and cost object” (Narong 12). Activity-based costing allows business to accumulate information and data about operating costs of the company. Three things made this popular in the 1980s. First, it “eliminated the product cross subsidies inherent in cost accounting. Then, it revealed the sources of loss that were responsible for the decline in profitability. Third, it acted as a catalyst for decisions affecting profitability” (Turney 4). Activity-based costing allows firms activities to be identified. After the activities are identified, products are then assigned different indirect costs. Activity-based costing is sometimes referred to as horizontal or cross functional cost view. It provides

The activity-based costing (ABC) is a cost calculation method which based on activity as the core, recognize and measure the activity that uses the enterprise resource, make accurate calculations about the consumption of resource costs in activities, and then select the cost drivers, allocate all the activity-based cost to cost calculation object, such like the product or service. The