A Comparative Analysis of Traditional Costing Method with ABC Costing Method - Essay Example

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In this paper we are going to prepare the income statement on traditional based costing and activity based costing. After that the report tells about the differences in the product line profitability…
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A Comparative Analysis of Traditional Costing Method with ABC Costing Method
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Download file to see previous pages (Charles T. Horngren p150) Manufacturing company only produced a few types and high quantities of products before, traditional costing method which focused on direct costs were much more important than the production overheads, traditional costing would be accurate before While the production structure has changed, the times demand that flexibility and love of change replaced absorption costing method in Manufacturing company. Our company is a Manufacturing company. The company has a processing system that is used to manufacture two products: Hinkels and Quirts. Cost drivers are the real factors that decide the cost incurred and the resource consumed. Unlike the traditional method plagued by inaccuracy in manufacturing overheads allocation, ABC need not adopt two-stage cost allocation process to figure out the each target cost, in order to achieve cost information accuracy. Therefore, ABC adopts multi activities to distribute costs. It demonstrates that choosing proper cost drivers is the most important and key step.
In practice the ABC system uses many drivers as allocation bases in the second stage of the cost allocation system whereas the traditional cost systems tend to use, at the most, two second-stage allocation bases. (Colin Drury, 2002, p298)
II. ABC process: Activity-based costing has the following five steps:
a. Identify the different activities performed by the business.
b. Calculate the total cost of each activity over the financial period(cost pool)
c. Identify a cost driver (i.e. a causation factor) for each activity.
d. Calculate the cost driver rate(i.e. the average cost of one occurrence of the cost driver)
e. Assign part of the cost each activity to different products based to the extent to which each product has caused the activity to occur (i.e. ...Download file to see next pagesRead More
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