Traditional based costing systems typically use a single overhead pool - that is a single accumulation of costs that are not directly identifiable as product part costs or as labor. This would include supply and maintenance expenses, allocations of management salaries, depreciation, etc.
Activity based costing utilizes a lot of smaller more targeted cost buildups that are accumulated based on "activities". For instance, if purchase orders are only required from some vendors, then the cost of p.o. preparation and mailing is included in a small overhead pool that is only allocated to the products that use those parts. If a machine setup process is only needed for the processing of certain parts, then the cost of the setup is included in the pool for only those parts, etc.
Some advantages for the (ABC).
1. It facilitates delegation of decision making.
2.It helps management promote the concept of management by objective in which managers agree on a set of goals.
3. It provides a guide to the evaluation of performance and helps to establish standard of performance, which are then used for comparison purpose.
4. It permits effective use of the concept of management by exception which means that the manager's attention is concentrated on the important deviations.
difference between conventional costing methodology ang activity costing
In traditional costing, overheads are allocated using blanket rate while in activity based costing overheads are allocated by the activities performed.
a activity costning is you are costing a what evr and the actity is a you are active in all of the subject
Activity based costing has primary difference of allocation of overheads which are based on activities performed by any department while in traditional costing system overheads are allocated on predetermined rate which may be not very accurate.
activity based costing does not promote TQM(total quality management) and continuous improvement but attribute based costing promotes the both.
An activity-based absorption costing system defines the cost by how many activities a product unit uses. A traditional absorption costing system defines the cost by how much money went into making the product unit.
difference between cost and costing
False. Activity-based costing is used to allocate indirect cost into direct costs.Regardng direct cost, traditional costing is as appropriate as activity-based costing.
Activity-based costing is a form of cost refinement, designed to obtain greater accuracy than traditional allocations in cost assignments for product costing and decision-making purposes.
Activity-based costing tries to take the nonuniformity of resource consumption across products into account in the assignment of costs.
Traditional costing system allocates the idle capacity cost to completed units while activity based costing only allocates the cost of capacity which is utilized while remaining capacity is expensed to income statement as period cost.
In Activity based costing all overheads are charged to function or department based on activities they perform while in absorption based accounting, overheads are apportioned using some kind of base rate like labor hours or machine hours etc.
Target costing is when you have a goal for the project and its costs. Absorption costing is when you need to fix the excess spending.
Under absorption costing overheads are allocated to production based on predetermined overhead rates like machine hours, or direct labor hours etc while in direct costing overheads are allocated based on activity performed and relationship with production units.
there is have some differeance . 1.
Traditional costing is a method in accounting where the manufacturing overhead costs are allocated to the products manufactured. It is also called as conventional costing.
Ask your Mom she might know shes old
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 allowing managers to make better business decisions. Derek Coleman
job costing refers to very small work while contract costing refers to large work like building a bridge.
actual costing uses actual indirect-cost rates normal costing uses budgeted indirect-cost rates
It is old costing technique & it is replaced by activity based costing
Answering "Problem relating to the implementation of activity based costing and activity based management system
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.
In absorption costing, predetermined overhead rate is use to allocate overheads expenses between departments. In marginal costing, Overheads are allocated between departments based on actual activities performed by departments.