Activity-based costing (ABC) is a better principle for companies than a traditional cost system. Discuss.
Student Name: Zhang Ruoshi
Assignment Title: Essay
Module Code: LZ118-122
Module Teacher: Rebecca
Manufacturing is one of the company's core processes, while accounting is the key impact for enterprise to produce good products. Activity-Based Costing (ABC) is a new method of costing system. This method can help a company to allocate costs more accurately in today's complex business world. In contrast to traditional cost system which is not suited to new manufacturing environment situation, ABC has taken the place of tradition system and been widely used in some countries, such as the United States, Western Europe and Japan. And the type of most enterprise is competitive, low labor costs and high-technology. This essay will analyze the unsuitable situation of traditional costing system and discuss the advantages of activity based costing and explain why it is better than a traditional cost system. It will compare the benefits brought by ABC in different sizes of companies.
Traditional costing system is not suitable for the new economics environment any more. In facing the impact of the new manufacturing environment, if a company insists on using traditional cost system, it will cause at least two major consequences (Nevous, 2011, p.1). The first problem is that the calculation of a product is not accurate (Nevous, 2011, p.1). Under the new manufacturing environment, manual work has been replaced by machines and computer-aided production system in some places and the percentage of labour cost has decreased. However, manufacturing expenses diversified at the same time, so reporting accurately how much a company cost on various products becomes a hard work. Another problem is that cost control may perhaps cause some negative influence (Nevous, 2011, p2). Traditional cost system will combine budget...