How do you calculate a traditional costing system?
What are the differences between activity-based absorption costing system and traditional absorption costing system?
How do activity-based costing and the traditional cost system treat idle capacity costs differently?
In traditional costing system overheads are spread over volume of production by using spread rate which is called blanket rate or absorption rate while in ABC costing costs are allocated on the bases of actual activity performed in specific cost centers so this is a accurate method for allocating costs according to activity performed and not with just any estimated rates
ABC....why? The problem with Traditional costing is that it can easily over-allocate overhead to cost objectives. Traditional costing is production volume driven so its would be easy but yet inaccurate to assign a Skittles production with more overhead than say a the division within the same company that makes custom pies. Activity based costing accounts for the multiple costs that go into making a product or service thus making allocation of overhead more efficient and…
Activity-based costing is a more accurate cost management system than TCA. One would use the ABC method when overhead is high, products are diverse, cost of errors high and competition is stiff. Traditional Cost Accounting is unable to calculate the 'true' cost of the product. TCA arbitrarily allocates overhead to the costs of objects. Total company's overhead is allocated to the products based on volume based measure e.g. labor hours, machine hours.
Traditional Cost Accounting System: In this system company first produce the product and then determine the cost of production and then try to sell that product at price covering that cost plus certain percentage of markup on cost. Target Costing: In this system first of all company determines the value of product in the eyes of customer that is how much a customer is willing to pay for the product and then if cost of…
Main disadvantage of tradional costing system is that it allocates the overheads based on formula which is not accurate because it allocates the cost to department which even not performed any work. It is also a disadvantage is that, it allocates the cost of idle capacity to units as well instead of charging it to income statement.
The Traditional costing system used to allocate/assign overhead costs to products by using only volume based cost drivers. In fact, these traditional systems were designed decades ago when most companies manufactured a narrow range of products, and direct labour and materials were the dominant factory costs. Overheads costs were relatively small and the distortions arising from inappropriate overhead allocations were not significant. Danish Ayub
Problem relating to the implementation of activity based costing and activity based management system?
Advantages of Activity Based Costing System: Activity based costing system has the following main advantages / benefits: More accurate costing of products/services, customers, SKUs, distribution channels. Better understanding overhead. Easier to understand for everyone. Unit cost rather than just total cost. Enables costing of processes, supply chains, and value streams
Actual costing uses the the actual costs incurred to calculate cost per unit. All you need is the actual costs and the number of units produced/manufactured, divide the two and you will have your actual cost per unit. The same process for overhead allocation as well. The actual overhead costs are allocated on a rate that is based on actual costs. Actual costing is a delayed analysis.
Traditional costing and activity-based costing (ABC) is to comment on the uniqueness of the products received. In traditional based costing, costs can be allocated to all products, because they are not unique. Traditional based costing works well for homogenous products that go through the same manufacturing process. ABC works well for products that are not homogenous and that can be run into batches. It helps apply costs to products that perhaps have had more "activities"…