Traditional Cost Accounting Method vs. Activity-Based Costing

Pages: 3 (718 words) Published: March 23, 2014
In this module's case study, we have been tasked to examine the case study of John and Mary Farmer. This case study is about a couple who produce corn and soybeans on their 1060 acre crop farm. The intent of this study is to determine if John and Mary Farmer should continue to comply with traditional cost tactics or change financial management tactics by switching to an activity based costs system. First, in order to understand this discussion we must discuss the differences between traditional costs and activity based costs. I will then describe the article, "Throw Out Fixed and Variable Cost Thinking—Bring In Activity-Based Costing for Distribution Decisions". Let me begin by explaining the differences between traditional costs and activity based costs.

Activity-Based Costing (ABC) arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods. The traditional cost accounting methods were designed around 1870 - 1920 and in those days industry was labor intensive, there was no automation, the product variety was small and the overhead costs in companies were generally very low compared to today. However, from the 1960s - particularly 1980s - this changed rapidly. For these reasons, and more, traditional cost accounting has been called everything from 'number 1 enemy of production' and questions whether it is 'an asset or a liability' have been raised. Below are the advantages and disadvantages of ABC. ABC Advantages

More accurate costing of products/services, customers, SKUs, distribution channels •Better understanding overhead
Easier to understand for everyone
Utilizes unit cost rather than just total cost
Integrates well with Six Sigma and other continuous improvement programs •Makes visible waste and non-value added
Supports performance management and scorecards
Enables costing of processes, supply chains, and value streams •Activity Based Costing mirrors way work is done
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