Abc Costing

14 Pages 3609 Words

However, the reasoning behind this practice tended to be somewhat misleading and provided indications that various products, when produced, would prove to be profitable projects. These misleading projections usually stemmed from the improper inclusion of all manufacturing costs while failing to include vital non-manufacturing costs, which resulted directly from production. (Carrol, 2001)
With managers and companies becoming increasingly frustrated with various forms of traditional costing systems, the need for a more reliable, accurate means of cost accounting increased in demand. As a result, the concept of activity based costing (ABC), A system of accounting that focuses on activities as the fundamental cost objects and uses the costs of these activities as building blocks for compiling the costs of other cost objects, was introduced (Foster, 1991). The implementation of activity based accounting systems proves to be beneficial for manufacturers in regards to making crucial decisions. This concept would serve to provide management with cost information regarding crucial decisions, which could possibly result in manufacturing capacity being altered, which in turn, would lead to changes in fixed costs.
However, how exactly does activity based costing match up with a traditional costing system and how does it provide managers with crucial information for decision making? In order to analyze this point, the similarities and differences between the two systems must be illustrated. Throughout both systems, the practice of including manufacturing costs to products is common. As well, each deals with a cost pool and an allocation method of costs in order to maintain records. The similarities are somewhat trivial and it is the differences between the two systems, which illustrate the added value, an activity based costing system has to offer. With a typical, traditional system, usually one indirect cost pool is created for each...