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Difference Between ABC system versus Traditional based costing system
Published by slang April 18th, 2006 in Activity-Based CostingThe differences are tabulated as follows:
| Traditional Based Costing |
|
| 1 |
Relying exclusively on volume measures such as direct labor hours or machine hours to assign overhead costs to products |
| 2 |
Assign only manufacturing costs to products. |
| 2 |
Assign all manufacturing costs to products |
| 3 |
Often use a single plant-wide overhead pool or just one overhead pool per department. Rely solely on volume as the base for allocating overhead costs. The most common allocation bases in traditional cost systems are direct labor hours and machine hours. These bases work correctly when changes in the quantity of the base are correlated with changes in the overhead costs being assigned using the base. |
| Activity Based Costing
|
|
| 1 |
Often use direct labor hours, machine hours, or other unit-level allocation bases to assign the portion of overhead costs that move in tandem with the volume of production.
However, unlike traditional systems, ABC also uses additional allocation bases that are not related to the volume of production to assign overhead costs that are not correlated with volume. |
|
2 |
Assigns both manufacturing and non-manufacturing costs to products. |
|
|
Do not assign all manufacturing costs to products · ABC only assigns a cost to a product if decisions Concerning that product will cause changes in the cost. |
|
Uses more cost pools. |
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Related Entries
- Activity-Based-Costing System (ABC): Introduction And When It is beneficial
- Activity Based Costing As a One Step Attribution System Compared To Other Traditional Systems
- Limitations of Activity-Based Costing (ABC) System
- Types of Activity Measures & Activity Cost Pool And Corresponding Activity Measures
- Steps In Implementing Activity-Based Costing System(ABC):
10 Responses to “Difference Between ABC system versus Traditional based costing system”
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hi,
Currently i`m doing a research about COMPARING PRODUCT COST DERIVED UNDER THE TRADITIONAL ACCOUNTING METHOD AND ACTIVITY-BASED COSTING SYSTEM.
But i`m having lack of idea in writing my literature review and my finding…would u help me?
Abstract
The main aim of this project was to obtain an understanding of the different product cost derived under traditional method and activity based costing method that affects the company financial performance. The results of both methods were used to develop a framework to aid company in identifying the difference and the benefit of using activity based costing.
Most business use standard costing techniques into their product costing because it is easy to use and understandable, but current method is not include the whole manufacturing cost or overall operational direct cost, thus QQQ Sdn. Bhd. failed to apportion or allocate their production cost on realistic basic cost. Old method apportions these to arbitrary basis like direct labour, number of units produce and sold. This project will look at the existing of each activity and the relationship between the driver and the product.
In this project, I have show how ABC approach can benefit in the QQQ manufacturing company and compared the information that was available that I believe to be important and relevant to help them in decisions making. This report was not to produce a complete report of working model, but more to explain and demonstrate how activity-based costing will benefit the manufacturing company. This research will give production managers more accurate information that enables managers to take right action that will improve the profitability of their companies. This information can give company a substantial advantage over their competitors because the users of new product will have enough time to improve the performances of their bottleneck and to search for more profitable usage of excess capacities before the actual production take place.
(272)
1.0 Introduction
1.1 Company Background
QQQ Sdn. Bhd. is a private limited company in Malaysia, core business in manufacturing the skin care products, lipsticks and fragrances with more than 5 years experiences. Mr. Harith Fadhilah, is the Managing Director, who also one of the founder of the QQQ (M) Sdn Bhd. This small manufactures company has a mission to be the leader in manufacturing quality skin care and fragrance product in Malaysia. They manufacture very fine and consumer safe products. Mostly their direct materials are imported from Korea because they only use high quality ingredient. With the strength and capability, they are able to acquire latest quality skin-care product, fragrance and lipsticks expertise to further strengthen their competitiveness and react fast to meet customer needs.
Their production range are manufactured based on several procedures start from material were bring into mixing machine, heating, grinding, degassing, filling, cooling, mold releasing and finishing assembly. Then product is ready to market and distributed. There are three machine involve in this whole production process, which is mixing machine, seizing machine and grinding machine.
Company current system measuring product profit by simple calculation of total of overhead and divide by unit produce. Thus, their product costing will remain at problem and company unable to detect how to reduce production cost.
Hence, finance department and Production manager felt that with the implementation of ABC in the company, it will help them to clearly identify the most profitable product and the least profitable product in their company. Meanwhile, ABC also can help organization to educate their employee to understand with the various costs involved in production that enable them to analyze the cost and see which activities that add value and those that not add value.
1.2 Identification of problem.
Manufacturing industry required continuously improvement in the technology and advance costing system in order to sustain their competitive advantage. QQQ current system only looks at the current year profits but not the pontential looses attached to the range of product that they produce. This traditional method simply calculated the product profit but neglect the cost associates with marketing and distribution.
With the increasing of manufacturing cots every year, QQQ existing method unable to give them accurate costing that lead to wrong pricing and thin margins. Current method represent the amount of overhead used in their range product process for skin-care, fragrances and lipsticks to production lines based on unit produce. Infact, this old method also may result of distortion in product costing in accounting periods of low production volume because direct cost and fixed cost are included together. Beside that, manufacturing overhead cannot be reduce accordingly even the production volume is low.
The usage of complex machinery in the production process in recent year’s results worst by dissimilar usage of machinery for the entire range of products. Skin-care required longer machine hour and consume more complex process than fragrances and lipsticks. Current methods allocate cost based on total machine hours used may not fully recognize the unused capacity cost. Hence, there is a consequence that skin care production cost is subsidizing other range product.
At first, QQQ organization a bit reluctant in developing this ABC method to estimates their exact cost because these systems are expensive to adopt and maintain. But finance department believes that ABC system will help them to align their cost of many cost objects of unit’s batches and production process that provides accurate information to support managerial decision and allowed higher proportion of total cost to be allocated to the product more strictly according to production activities.
1.3 Research Question and Objectives
The aim of this project report is to develop a useful approach to understand and define the product cost effectively.
The objectives of this Project Report are:
1 To compare the difference in costing derived from a traditional costing system and activity based costing system.
2 To identify any non-value added activities.
3 To illustrate how activity based costing systems prevent misleading information for decision making in company.
4 To draw conclusions and recommendations regarding the applicability and usability of the activity based costing systems to the organization.
Need help,
rushda
thanks alot!!!!!
I want to write a report about activity base costing and traditonal costing but I have no idea where to begin
I am currently do an assignment based in the field of ABC.
the question is:
ABC is ‘old wine in new bottles’ critically discusss.
any advice?
Respected sir
I am prakash doing mba in final year . currently doing project sem. i have selected a study of activity based costing in fuses production company in pondicherry . so requstly please help to me sir ,please give me a some guide line of research methodology, objective,finding,suggestion ,topic introduction and any other .I WAITING FOR YOU REPLAY SIR
THANKING YOU
ON SUBJECT RELATED TO ABC, PLS REFER TO
” LIFE CYCLE COSTING USING ABC & MONTE CARLO METHODS TO MANAGE FUTURE COSTS AND RISKS”
BY JAN EMBLEMSVAG, 2003
I am doing research on Product Life Cycle Costing, while ABC deals with more detailed cost elements.
rgrds,
Ahmed
Dear Sir/Madam
I’m doing MSC Financial Management, I’ve to write an essay on ABC System in Practice. , and I’ve to elaborate these two elements in my essay.
• Describe the fundamental differences between a traditional and an ABC systems;
• Identify and discuss the factors that could affect the successful implementation of an ABC system
I don’t have much idea about it. Please give me some idear or help me out for this. Or send me some journals links from where I can get help.
Regards
Kashif.
Dear Sir/Madam
I’m doing Master of Proffesional Accounting, I’ve to write a report on cost per unit under ABC System in Practice and traditional costing system , and I’ve to elaborate these two elements in my essay.
• Describe the differences between cost per unit under traditional cost system and ABC systems;
• Identify and explain the possible advantages and disadvantages of adopting the ABC system
I don’t have much idea about it. Please give me some idear or help me out for this. Or send me some journals links from where I can get help.
Regards
Narinder Singh
iam doing home studies and i should say i have enjoyed reading this but am asking for a comprehensive practical example how to go about it in an exam situation.