![]() ![]() (3) Use of Historical Costs:Īnother difference between traditional and activity-based costing is the historical orientation. Thus, in ABC, there is no need to allocate/reapportion overheads of service departments. But ABC creates separate cost pools for service activities as well and overhead costs of these service activities (service departments) are assigned directly to specific products through applying cost driver rates. In traditional costing, overhead costs of service departments are allocated/reapportioned to production departments and therefore in this costing system finally only fewer cost pools exist. But, in ABC, many activity-based cost pools or cost centres are created. In traditional costing, overheads are pooled/collected department- wise. But in ABC, in the first stage, overhead costs are assigned to each major activity and not to departments. In traditional costing, in the first stage, overhead costs are allocated to production departments. It can be observed that both the costing systems follow a two stage allocation procedure. Traditional Costing and Activity-Based Costing System : Exhibit 4.6 presents an overview of product cost determination under traditional costing and ABC system. ![]() By establishing the link between these cost drivers and fixed overhead costs, they are finally traced to individual products. In this way ABC improves product costing procedure (as compared to traditional costing) because it recognises that many so-called fixed overhead costs vary in proportion to changes other than production units. In summary, in ABC, each overhead activity has a overhead cost pool at the organizational level, each overhead activity has a cost driver with its unit of measurement and each cost driver has its unit cost i.e. The overhead cost is allocated, in this manner, to the component for all the overhead activities the component used. Now, by multiplying the units of cost driver actually used by the component by this cost driver rate, one can get the actual cost of that overhead activity performed on the component. This gives the actual cost per unit of the cost driver of that activity. Also, unit cost of each activity driver is worked out by dividing the total overhead cost pool of that activity by the total units of the cost driver used at the organizational level. This is called the overhead cost pool of that activity. On each overhead activity, the total cost of that overhead activity is collected at the organizational level. how many units of that cost driver were actually used by the component. Each overhead activity is measured in terms of its cost driver i.e. In ABC, there is a need to find out the actual overhead activities performed on the component. In fact, there is no rationale to it since the component may not have actually attracted the overheads to it in this manner of percentages. Generally, this percentage is either the percentage of the labor cost or as the percentage of the material cost of the component or labor or machine hours as compared to the overall labor cost or overall material cost or total labour or machine hours of the entire organization. ![]() In conventional costing system, it is done by loading a percentage of the total overhead cost of the organization to the component. G.To this will be added, the portion of overheads of the organization that actually got consumed by this component. Thesis, Department of Industrial Engineering, Köker, "Activity-based costing: Implementation in a sanitarywareĬompany," M.Sc. Lewis, "Activity-based models for cost management systems," Qian, "Activity-based cost management for designĪnd development stage," International Journal of Production Economics, Gunasekaran, and M.Sarhadi, "Implementation of activity-basedĬosting in manufacturing," International Journal of Production Production activities for an advanced manufacturing system,"Įngineering Economist, vol. Kaplan, "How cost accounting distorts productĬosts," Management Accounting, vol. T├╝rker, "Activity-based costĮstimation in a push/pull advanced manufacturing system," International The results of the application highlight the weak points of traditional costing methods and an S-Curve obtained is used to identify the undercosted and overcosted products of the firm.ĭigital Object Identifier (DOI): doi.org/10.5281/zenodo.1078261 Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF The objective of this paper is to illustrate an application of ABC method and to compare the results of ABC with traditional costing methods. It can be considered as an alternative paradigm to traditional cost-based accounting systems. Activity-Based Costing (ABC) which has become an important aspect of manufacturing/service organizations can be defined as a methodology that measures the cost and performance of activities, resources and cost objects. ![]()
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