Explanation of traditional and activity base costing methods

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In Morden world, the competitors are forcing the service/ manufacturing organisations to become more flexible by increasing their productivity by reducing the costs. The arrangement of the essay is as follows, the first part of the essay provides the introduction and explanation of the traditional and activity base costing methods, the body of the essay compare and contract the traditional and activity base costing in Morden organisation and in finally summarise the whole research information.


In the business world cost system used to provide the information regarding the direct labour hours and total units produced by the organisation. Costing system is important measurement in the every organisation to prepare proper budgeting operations. And also the providing information by the system is useful to reduce waste and allocating resource to different section in the organisation and that will be greater benefits to managers to understanding the necessary resources for in designing and implementation stages of the products. The traditional and activity base costing system are two types of systems that can be use to evaluate of cost within the organisation. Basically the organisations use traditional cost system to estimate the total manufacturing cost related in the individual operations of them. Most of the organisations main goal is to gain more profit, which is requires recovering the competitiveness. The activity base costing is more relevant in this process because it associated with the organisations intergraded process and operates with the relevant plans.

The highlighted point in the ABC system is it focuses on the activities as the primary cost objects the system not substitute costing system to job or process costing systems and also the ABC system only develop the number of cost used on those systems. Whereas in the traditional costing g system focal point the services and products of the organisations as the cost objects and they take those objects as consume resources. Under the ABC system product and services take as consume activities and consider those activities relate to the resources. (APPENDIX 2) (A)

Activity base costing (ABC) system utilize as a good methodology to measure the performance and cost of organisation resources, activities and their cost objectives. In traditional cost system, capture the directly related materials and labour cost. (B) . Due this reason ABC implementation's main aim to reclassify most of them such as indirect cost as direct cost. By causing to the reclassification process the accuracy costs will increase in the ABC system.


The S-Curve will occur when we considering the comparison of the traditional and ABC cost (see appendix 1). And that will present by assistance of the ABC study clearly we can identify the hidden loss of product under costed and hidden profit of the products over costed by traditional method. The important point in here is by observing real ABC costs of the product firm can reprice the output of the products and put on a competitive advantage. (B)

When analysis the cost calculation if we get equal output process by both method then ABC method avoiding to implement because this method consuming more time and data in implementation process.

Product pricing decisions is next significant point in comparison of both methods, the main goal of ABC is gain competitive advantage by increasing or deceasing product costs and reducing weakness of the firm's information system. When analysing the Performance analysis of the firm the balance score card (BSC) implementation is playing important role and it is provide great advantage to firm in their short and long term processes under the ABC method.(B)

Compare to the traditional costing system, ABC collect the overhead cost of organisational activities and allocate the cost in to that activity related products and services. (C)

Also ABC method have the inherent flexibility to offer special reports to management decisions because they focus to collect costs through the numerous key activities and they will provide superior information according to the cost allocation. But the traditional measure accumulates the costs using organisational units. In addition to traditional method continuing of financial reporting requirements, in ABC method will continue extra rather than replace requirements.(C)

Even as ABC system more complex and costly to apply, Charles, Horngen, Gray, Sunden and William defined that most of the organisations are accepting ABC system for a varies reasons such as,

Individual products accuracy margin and customer classification becoming more difficult to reach given that labour is quickly being replaced with automated equipments and also the firm shared cost is important part of the total cost too.

The technological change keeps on to reduce the product life cycles and once the costing errors are detect firms do not need to make any adjustments in price or cost of the products.

Because of the mistaken measurement conduct on firm they may lose new proposals and gain hidden losses due to over costed or under costed products. Then will fail to detect not cost effective activities.

Nowadays, the cost of computer technology getting down therefore the prices of developing and operating costs of ABC system also decrease.

Karolefski agues that ABC works better and provide more benefits to the firm, customers and also the business partners. Furthermore he describes that there are various benefits when the foodservices distributors and restaurants changed to ABC system.

The productivity and accurate cost of the capital equipment can be measure.

Can understand about the profitable products and their sales efforts.

Provide the correct pricing range and details about the minimum size order.

Less time and money.