Traditional Costing Versus Activity-Based Costing Advantages and Disadvantages
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. However, it is important for the managers to understand that the resources necessary for designing and implementing the cost system should not exceed than the benefit drew out from the system (Thomsett, 2002).
Estimation of costs can be done with the help of two systems known as Traditional costing and Activity based costing.
Traditional cost system was developed by the organization, General Motors. The organization used this system to calculate the total manufacturing cost that is sum of all the costs related to individual operations. However, the cost that matters the most to organization is profitability, which is required for improving the competitiveness. This cost estimation is done by activity based costing. The basic preface of activity based cost system is that the organization is an integrated process and operates when there is proper supply of parts and raw materials at respective plants. It continues until the final good reaches the customer (Drury, 2008).
The traditional cost accounting system is based on the factors such as Wages and salaries, employee benefits, supplies, traveling allowances, depreciations and other fixed charges, operating expenses and miscellaneous (Dury, 2008). Activity bases accounting system is
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. However, it is important for the managers to understand that the resources necessary for designing and implementing the cost system should not exceed than the benefit drew out from the system (Thomsett, 2002).
Estimation of costs can be done with the help of two systems known as Traditional costing and Activity based costing.
Traditional cost system was developed by the organization, General Motors. The organization used this system to calculate the total manufacturing cost that is sum of all the costs related to individual operations. However, the cost that matters the most to organization is profitability, which is required for improving the competitiveness. This cost estimation is done by activity based costing. The basic preface of activity based cost system is that the organization is an integrated process and operates when there is proper supply of parts and raw materials at respective plants. It continues until the final good reaches the customer (Drury, 2008).
The traditional cost accounting system is based on the factors such as Wages and salaries, employee benefits, supplies, traveling allowances, depreciations and other fixed charges, operating expenses and miscellaneous (Dury, 2008). Activity bases accounting system is
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