Activity Based Costing and Traditional Costing System

Topics: Cost, Costs, Variable cost Pages: 2 (422 words) Published: September 16, 2012
Activity based costing
Activity based costing is an accounting method that is created to provide manager with cost information and other that potentially affect capacity. Activity based costing is used to determine product costs for management report. This method is commonly use as a complete to the company costing system. There are two activity based costing system that most organization use. The two are the official costing system that used for preparing external financial reports and activity based costing system that use for internal decision making and for managing activity. So that, the organization can measures the cost on their use of resources and activities. The primary task of activity based costing is to break out indirect activities into pool that can be assigned to processes in a manner which is better reflects the way costs are actually incurred. In activity based costing is to measure such as material, labor, space, equipment, and services that consumed by activities. The cost associated with activities then result the amount of resources that organization consumed per unit of activities. Advantage of activity based costing:

-Assesses costs of individual activities, based on their use of resources -Enables accurate costing of all activities to be obtained throughout an organization -Easy to identify where high and low costs are being incurred and the cause -A valuable tool for both business and process improvement

- Helps with future product planning.
Disadvantages of activity bases costing:
-It may be difficult to set up and establish
-Can be time consuming if all activities are to be cost
-May provide too much detail

Traditional costing system
Traditional costing system is assume all overhead activities are consumed equally by all products is relate to quantity produced. And all costs are allocated to products because the system assumes the current output driver is current overhead costs. This considers how the costs of...
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