Traditional Costing Methods versus ABC Costing Method

TraditionalCosting Methodsversus ABC Costing Method

TraditionalCosting methodsversus ABC Costing Method

Sofar,one of thebiggestchallengesfacedby mostmanufacturingcompaniesis a weakcosting system.Ithas beendifficultto accountaccuratelyforallcostsin traditionalcostingmethodswherein mostcasesthere are eitherirrelevantoverheadsorpoorlydonebudgets.Thecaseis evenworsewheredisbursementshavebeenof concern.However,thetraditionalcosting methodhas hadits advantagesyet thenumberof advantagesnevercompareto thoseof ABC costingmethods.TheABC costing methodcamein as a revolutionaryto thefinancedepartmentswhereitcarriedout a completeoverhaul of thecosting systemsleavingmoreimpressedmanagersandsatisfiedauditors.In otherwords,thecosting systemsneededtheABC systemwherein thefaceof rigidaccountantsandfinancemanagers,thebenefitsoutweighedmostinvestmentprofessionals’relianceon theconventionalcostingmethods.

Whenitcomesto conventionalortraditionalCosting systems,there is an assumptionthatparticularproductscausethecostsmeaningthecostsattributeto machinehours,directlaborhoursandmaterialdollars(Turney, 1989).In otherwords,whatever othercostsincurredduring a productionprocesstheywerealwaysreflectedin thedirectcosts.Themethodofferedan accurateproductcostespeciallyin volumerelatedproducts.Therefore,in caseswherecostsof productionbarelylinkto volumerelatedproductsthecostshaveoftenbeeninaccurate.Forinstance,there is a higherchanceof a manufacturerto overlookthecostsincurredin producinggoodsrequiringspecializedskillsthat leadinaccuraciesin theproductioncostsof theparticularitem.There are alsotimeswhena managerfailsto getaccuratecostsof producinga goodespeciallyon productwith morethan one volume-unrelated activity.

Ontheotherhand,whenitcomesto ABC costingmethods,somemeasuresare thereto ensureefficiencyin givingaccurateproductcosts.Priorto theimplementation of an ABC Cost system,there are five majorstepsnecessarythat are:identificationof resources,identificationof resourcesdrivers,identificationof activities,identificationof activitiesdriversandidentificationobjectsof work(Amir et al, n.d) .Therefore,theneedto implementan ABC systemin manufacturingcompanieswasas a resultof thenumberof directcostsin theindustrywhencomparedto theserviceindustry.In otherwords,theABC systemwasableto handlemanyaspectsrelatedto thesystemandmoreso,consistentto manufacturingexcellence.

Asare a resultof theABC implementation managerswereableto understandandeliminatewasteortheABC systemprovideda microscopiccosting forallcosts.Thecosting methodmadeita loteasierformanagersto makewisechoiceson their investments.Secondly,with theABC systemsin placeithas becomea loteasierto placereasonabledemandson production.TheABC systemsdoits bestin beingstraightforwardorsimplerto understand.In otherwords,anymanagershould havean easytimeunderstandingwhatthesystementailsandwhatitmeansto investa particularamounton a productthan theother.On theotherhand,thecomplexity of thesystemdoesgohandin handwith thecomplexity of manufacturingmeaningitis themostappropriatecosting methodforsuch a setting.

Inconclusion,themainadvantageof thetraditionalcosting methodis its capacityto provideaccurateproductcostson volumerelatedactivities.However,itfailsin manyotherways,includingprovidinginaccuratecostsandlackingrelevancy in volumeunrelatedactivities.Therefore,itwould onlybe prudentforanymanufacturerorservicesprovider to considertheABC methodforaccurateproductcosts.

References

Amir,A., Maelah, R., Ahmad, A., &amp Auzair, S. (2015). THEIMPLEMENTATION OF ABC – THE CASE OF A PUBLIC UNIVERSITY(Ph.D). Universiti Kebangsaan Malaysia.

B.BPeter, T. (1989). Activity-Based Costing: A Tool for ManufacturingExcellence. Target,13-19.