Traditional Costing Versus Activity-Based Costing Advantages and Disadvantages

2563 WordsJan 11, 201111 Pages
Traditional costing versus Activity-based costing Advantages and disadvantages Costing systems are the programs that supply information about the value of direct labor hours and numbers of units produced. With the help of data such as product cost, the managers can generate estimation of cost associated with different activity carried in the organization. The costs systems operate by taking total cost as basic for calculation. Costing is essential for every organization, as every manufacturing and other department has to be assigned accurate budget for proper operation (Hansen, Mowen and Guan, 2006). Costing system provide information that is useful to managers for minimizing waste and allocating resources to different departments.…show more content…
It is obvious that there is not just work of labor and machinery in producing finished goods (Cokins, 2001). It is necessary to consider fixed as well as variable overheads. Activity based costing system considers variable and fixed overheads, which helps in knowing the right number of activities involved in producing finished good. This process is known as unitizing fixed cost. Hence, the traditional cost system’s objective is to control cost, but activity based cost system plays more vital role of analyzing these factors to maintain the production in efficient manner (Anklesaria, 2008). In today’s uncertain business environment, it might become difficult to operate in rigid system that allocated cost to number of activities. Activity based costing system is not an improvement in the traditional standard accounting system, but an enabler for an establishment of the first time true management system. It is necessary to have flexible system, as rigid allocations do not work for an organizations having decentralized management system (Baumol and Blinder, 2007). Thus, application of activity based cost system over the traditional cost system helps the management to know the factors that are immeasurable and identify circumstances wherein the objectives get out of line on spending decision. Hence, it can be said that traditional cost system has control emphasis on cost and activity cost system has it on
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