Compare and contrast the alternative forms of costing:
- Activity based costing (ABC)
- Traditional Product Costing
- Variable Costing
- Absorption Costing
Activity Based Costing
Activity-Based Costing (ABC) is an accounting technique that allows an organization to determine the actual cost associated with each product and service produced by the organization without regard to the organizational structure. Activity- based costing can be used to identify discrete activities as well as identifying the primary output measure for each activity. With using activity-based costing there are value added-activities and non- value added-activities. Value added-activities are activities which customers are willing to pay for or show that after the process there will be a profit. Non- value activities are activities which customers are not willing to pay for or activities which do not show future profit. The activities must be analyzed in order to decide what will be a productive measure. When using activity-based costing an organization can measure costs against individual activities. With seeing what the results are, the company can figure out if there can be an adjustment made to create a value added-activity. If the activity turns out to be a non-value added-activity the organization may decide to delete the activity all together.
Activity Based Management helps one analyze, and monitor activity-based management information. Activity-based management also helps one go beyond traditional cost allocation to explain the types of costs-based on activities, materials, resources, and product or service components.(COA). With using this type of management you can have a better idea of what the right decision may be. Activity- based costing is also a form or method which is used to aid management or the decision maker of the project at hand decide if the project will be a profitable and successful one. Therefore, activity-based costing is an important part of activity-based management. When management needs to make a decision and they wish to know what the costs, production, revenue or effectiveness will be they can choose to use activity-based costing which in turn can be used together with activity based management.
Why Activity Based Costing?
A). Models the business from a functional perspective.
B). Focuses on understanding and changing business practices, not
automation of business practices.
C). Inputs and Outputs do not represent data.
D). Provides a complete description of a set of activities.
E). Avoids or lessens distortions in product costing that result from
arbitrary allocations of indirect costs.
F). Helps benchmark for improvements.
Every business which chooses to use ABC develops their own form or ...
This solution looks at each alternative form of costing: activity based costing, traditional product costing, variable costing, and absorption costing. It defines the different types of costing, compares the advantages and disadvantages of the method and looks at how it might help a company or organization.