Product Costing - Traditional Methods and Activity Based Costing - Term Paper Example

The problem here is that the tools used for production are shared by two parties and that the farm is under the control of several parties. Hence, the establishment of profit and cost centers is essential for rightly measuring the level of earnings and costs. In the system of Activity-Based Costing, the activities are mainly taken into consideration. “Activity Based Costing is a costing system that assigns costs based on activities performed. The activities could be unit level, batch level product level or factory level.

All costs related directly to the making of the product is accumulated and then divided by the amount of unit produced or working hours used in to obtain unit level costs” (Activity Based Costing, 2007). The use of managerial accounting method revealed that the management could exercise its own discretion with regard to assigning costs that link different commodities and processes. The Activity-Based Costing process tries to highlight the fact that if information, such as this, are disintegrated and given to managers then they will know how to create further sound decisions regarding the expenses incurred by the organization.

In earlier times, managers have been inconvenienced because of lack of such data. Costing the activity is usually an important step that enables charging of overhead costs to goods, as to get more accurate product cost information. On the other hand, sometimes, the activity itself is the cost purpose of interest. For instance, a manager of a company might want to know how much the company spends to obtain their reserves as input in a sourcing decision. As exemplified in this case study, Mary and John Farmer are going to need to assemble a substantial level of information in order to execute an activity based costing method.

Consequently, in conducting a cost profit analysis of executing the managerial accounting method, the cost of assembling the data will need be taken into account. Additional expenses will be incurred by the continuation of the information method, which will need to be supported by expensive software and hardware requirements. These are the drawbacks that agricultural enterprises can run up against while executing a planned solution. 2. In the traditional cost allocation system, farmers plant too many corn and soybeans as per the preceding year’s demand for that particular product.

This is not at all a practical thing to do when it comes to the farming business. “In contrast to traditional cost-accounting systems, ABC systems are not inherently constrained by the tenets of financial reporting requirements. Rather, ABC systems have the inherent flexibility to provide special reports to facilitate management decisions regarding the costs of activities undertaken to design, produce, sell, and deliver a company's products or services” (Activity-Based Costing, 2011, para. 6). According to this case study, I prefer the alternative solution because it outlines the connection among the centers for an optional managerial accounting plan rather than just a support cost centre for maintenance, tools, shop or even the farm in general.

This case study states that the suggested solution is the cost and profit centers. It is supposed from the argument between Mary and john that it is their initial interest. It enables recognizing the changes in cost of production among farms and its effect on the whole profitability among products produced in