ACTIVITY BASED COSTING

“Activity-based costing is superior to traditional absorption costing and all firms should implement it”.

Discussion of the Statement: “Activity-based costing is superior to traditional absorption costing and all firms should implement it”.

Introduction

This assignment is based on discussing and valuating the applicability of ABC costing systems, in contrast to the traditional absorption costing method. It relates on outlining the key reason why companies should be implementing the ABC system in their accounting systems to realize potential benefits of accurate reporting and proper documentation.

Comparison to Traditional Absorption Costing System

Traditional absorption cost development at a time when many organizations production only a limited range of products, and when the expenses were only a small fraction of total costs.Calculation of activity-based costs, using different drivers of cost to estimate different overheads, while the traditional absorption costing uses only one, for example working hours or machine hours per unit (Stratton, Desroches, Lawson, 2009, p. 31-40). In the activity based on fixed overhead costs may include costs of the machine configuration. These costs do not run on a unit basis, but it runs every time the team has to be setup. Comparison of the absorption worth in evaluation with activity-based costing, activity-based costing advances the value of administration accounting data, particularly in bigger procedures and more goods in which accepted procedures of allocating overheads, for example the worth of absorption may lead to mistaken results (Ness, Cucuzza, 1995, p. 130-138).

However, an efficient use of configurations for this special rate for allocating costs to the units. In this way, firms are able to account for proper costs and precise estimates of these costs related to various products and services to identify and eliminate effects that are profitable and lower the prices of which are expensive. Product managers and marketers know exactly how unexpected ...