Activity-Based Costing vs Traditional Costing - Essay Example

Activity-Based Costing vs. Traditional Costing The activity-based product costing differs from the traditional product cost method in the following manner, the activity-based methods of costing regulates activities related to production, allocates a cost to the same activities and finally decides the product cost. Conversely, the traditional method of costing allocates cost at an average rate to all product-based products. The traditional method brings together any price that are indirect in the production and equally implements the costs across the board through employing one applicable cost driver, for instance, the machine hours.

The other difference between the two methods is that activity based costing is accurate because it accounts for significant issues before it allocates cost to a given product (Zimmerman & Yahya-Zadeh, 2011, pp. 258). Contra wise the traditional costing is not accurate because it only considers specific products.Activity based costing demonstrates the cost of a product cross-subsidization challenge in cases where some products costs are higher and also when other products costs are lower as compared to the traditional method produced costing.

The ABC regularly demonstrates that other products cost are highly costed while others are under coasted, hence resulting in crossing subsidization.Activity based is used to progress profitability through analyzing first the clients demand products, customers may require little or considerable support. Therefore, ABC helps in determining different amounts of customer’s activities be supported, and their costs for each client benefit and, as a result, deciding customer’s profitability (Kaplan & Anderson, 2013).

 However, the customers benefit is determined after the consideration of the customers support.Some of the ABC disadvantages are that implementation is expensive and time-consuming to establish ABC system. The system requires more resources like software that could be costly and consultants with the necessary expertise (Goektuerk, 2005). The other disadvantage is data misinterpretation due to challenges in interpreting ABC data with often accounting information, which can be at times tricky, regarding decision-making.

ReferenceKaplan, R., & Anderson, S. R. (2013). Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press. London. Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.Goektuerk, H. (2005). Activity-Based Costing (ABC) - advantages and disadvantages: How ABC can be applied to institutions of higher education. GRIN Verlag. Norderstedt.