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Accuracy of ABC Systems and Traditional Costing Systems

ABC systems are always more accurate than traditional costing systems. Do you agree? Why?

What is an ABC System? The ABC system that identifies the various activities performed in a firm and uses multiple cost drivers (volume and nonvolume based cost drivers) to assign overhead costs (or indirect costs) to products. ABC recognizes the causal relationship of cost drivers with activities.

Why do you think that more organizations are adopting ABC systems?

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ABC systems are always more accurate than traditional costing systems. Do you agree? Why?

What is an ABC System? The ABC system that identifies the various activities performed in a firm and uses multiple cost drivers (volume and non-volume based cost drivers) to assign overhead costs (or indirect costs) to products. ABC recognizes the causal relationship of cost drivers with activities.

Why do you think that more organizations are adopting ABC systems?

ABC systems are always more accurate than traditional costing systems because of the following reasons:

Traditional costing does not show the cause of arisen costs. However, in ABC costing the each transaction is coded and cost can be easily controlled by tracing the excess cost to the activities involved. Therefore, organization should have sound coding system to allocate the costs to the resources in ABC costing.

ABC provides a system to allocate costs more accurately when overhead costs are not incurred at the same rate as direct labor dollars. The more activities identified the more complex the costing system becomes. Therefore, the organization should have the computer system to manage ABC costing and should limit the number of activities to the manageable extent. ABC provides a more accurate estimate of costs for use in making management decisions than the overhead cost system.

When the organization is having high organizational complexity and changes, ABC ...

Solution Summary

This solution compares the accuracy of ABC Systems with traditional costing systems.

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