Traditional Costing Method And Activity Accounting Essay

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In this assignment, I have learned a lot of i about Traditional costing method and Activity - based costing and also changes of management accounting. This coursework have first part need to calculated traditional costing method and activity based costing from the information that given. After that need give definition of both traditional costing method and activity- based costing, not only given definition but also include with distinctive, advantages and disadvantages. In first part also asked student to do report to the director of Scooter Driver based on the issues raised by each of the directors. the coursework have to give the the changes of management accounting over the past decades and also the impact and effect of the changes in management accounting.

Table of content

The content page

Qeustion 1 (a)

Absorption costing calculation………………………………………………….. 1-4

Activity - based costing calculation…………………………………………...... 5-7

(b) (i) Evaluate Traditional base costing and Activity- based costing………………….8-12

(b) (ii) Evaluate the issues raised by each directors…………………………………..13-14

Qeustion 2

Explain the changes, impact and effect of the ……………………………….15 20

Management accounting over the past decades

References…………………………………………………………………………… 20-23

Current Method

Production Cost Per Unit





2.0 Activity-Based Costing Method

2.1 Production Cost Per Unit

2.2 Profit




Traditional costing system tresses overheard to products using a small number of second stage allocation rates the term cost driver is used by activity based costing (Hansen, Mowen & 2006).Traditional system use a limiting number of different types of second stages volume based allocation cost drivers, where activity based system use many different type of volume based and non volume based cause effect stage drivers (Drury, 2005).

First, as the cost allocation system was based on direct labour hour or cost, cost centre manager tended to believe that direct labour cost should be reduce in order overhead and in turn to improve profitability (Dysen, 2007). Second, the traditional cost allocation system could prompt managers to make unwise, for instances when expensive because overhead was allocated based on direct labour hour they tended to subcontract such process to outside suppliers (Wickramasinghe & Alawattage, 2007).

Third, as result of the above intonated issues the traditional costing system was not sufficient flexible to accommodate different production situation, and in a competitive environment where production system are becoming customer -oriented ,rigid calculative practices, such as direct labour based cost allocation cannot be compatible with the changing needs of customer ( Gowthorpe,2008).

Fourth, it was observed that the traditional costing system was associated with the problem of timelines basis accounting principle and based on this traditional cost allocation system, firms tended to prepare monthly performance reports together with variance analysis(Weetman, 2008). Last when the traditional system was not of help in providing accurate and timely information for product costing and operational decisions profit center managers to hierarchical organization looked for other avenues to make bigger profit avenues other than that increasing sales, enhancing market share, innovating new products ( Bhimani, T.hotngren, M.Datar, foster,(2008)


Activity based costing (ABC) is a system that assigns overheard rates to the specific activities performed in a manufacturing or services delivery process(Brook,Oliver&vesty ,2008).activity based costing may be useful in making product pricing decisions where manufacturing operation involve larger amounts of factory overhead(Scarlett, 2004). By providing more accurate product cost allocation activity base costing aids in setting product price that will cover costs and expenses (Warren, Reeve & E.Fess, 2005).Activity based costing is an attempt to absorb overhead on the demands that a particular unit in production makes of the various resources that is uses before it is completed and becomes part of the finished stock (Dysen, 2007).

They can be used analyze the profitability of major customers and they provide a logical framework for managing the business through the identification and analysis of key activity characteristics such as root cause cost drivers and performances measure (Smith, thorne&Hilton,2006). The products attributed selected depend on the purpose begin activity, or attributed with product costing type of resources consumed on a activity by workers, cost objective that consume activity and a measure of activity consumption driver (Brook,Oliver &Vesty ,2008).

The manufacture of motor cars is highly mechanized and much was perversely done by humans is now performed by robotics and therefore the cost has shifted from direct to indirect (Bazley,Berry,Hancock & Jarvis,2004.). First multiple products need for(ABC) offers no increase in product costing accuracy for single product setting,

Second there must be product diversity if product consumer non-unit level activity in the same proportion as unit level activity ties (ABC) the same functional based assignment and third non-unit level overhead must be significant percentage of production cost( Hansen&Mowen,2006). Cost could be allocated to inspection production on the basis of the number of unit (Unit Based) or number of inspecting (Activity Based),( Bazley,Berry,Hancock&Jarvis,2004).


There is a basic philosophical difference between the traditional and activity based costing approaches traditional we tend to think if overhead as rendering services to cost units the cost of which must be charged to those units and activity based costing seen overhead as being caused by the activity, the activity that must be charged with the cost that they cause (Atril &Mc laney ,2007).

The major difference relate to the two stage allocation process in the first stage traditional system allocation indirect cost to cost centers normally department where activity based system allocation indirect cost to cost centers based on activity rather than department ( Dysen, 2007). Traditional system generally assign only production cost to the products these are the only cost that (GAAP) allows companies to include in the inventory value of a product for financial reporting purpose, and traditional system of ten focus on simply measuring such inventory value ( Horngren, Sundern , Stratton, Burstahler & Schatzberg, 2007).

Traditional approach overhead are apportioned to product cost centers each product cost centre would them derive an overheard recovery rate typically overheard per direct labour hour and then be applied to units of output according to how many direct labour hour were worked on them. Activity based costing the overhead are analysis into cost pool one cost each cost driving activity and that rates are attempt to represent the extent to which each particular cost units is believed to cause the particular part of the overhead ( Mclaney & Atrill, 2004&2008).

ABC sees overheads as being caused by activities, and so it is the cost units that cause the activities that must be charged with the cost cause it is not always easy to see how and why some overheads costs have arisen (Wickramasinghe & Alawattage, 2007). This has traditionally made them more difficult to control that direct labour and materials costs If, however an analysis of overheads can identify the cost drivers, question can be asked about whether the activity driving certain costs is necessary at all, and whether the cost justifies the benefit.(Smith, 1995).


The use of traditional costing method is Traditional costs that are viewed as reasonable by employees can promote economy and efficiency. They provide benchmarks that individuals can use to judge their own performance. Can greatly simplify bookkeeping. (Atril &Mc laney ,2007).

The actual costs of each job, the standard costs for materials, labor, and overhead can be charged to a jobs. Traditional costs fit naturally in an integrated system of responsibility accounting. Can be used to arouse interest in a subject, The standards establish what costs should be, who should be responsible for them, and what actual costs are under control. (Brook,Oliver&vesty ,2008).

the final product absorption costing take consider all the costs that contribute to the final product also include both indirect cost and direct costs that. Can be traced directly to the product such as direct materials and direct labor prefer to cost.

Disadvantage of traditional method

Traditional costing is a bad system valuable in many companies because manufacturing companies are now using machines and computers for much of their production. Computers and machines make outdated system because it often uses direct labor hours to count the cost. Cost should not be given because of the cost of direct labor hours are not the best driver to use.

Traditional abortion costing unit product costs can be easily misinterpreted lead to misperception can lead to serious errors in making decisions. As managers s emphasis is total costs, the cost volume profit relationship is ignored and managers need to use his intuition to make the decision.


The first and most important advantage is the accuracy in the process of costing with regards to the product line, the end-users of the product, the stock-keeping employed by the management and the channel and category which the flow of the product from the producer to the end user.

This system better assists in the process of understanding the concept of overhead costs the allocation of common business resources as they are used some product lines and their relation to specific cost driver.

ABC system the information provided by ABC is generally regarded as more accurate than the information provided by most traditionally costing method and this accurate cost information allows management to make better decisions in areas such as products pricing, product line changes decisions.

This system helps in the process of better understanding the concept of resource allocation overhead costs business as common as they used by specific product line and their relationship to specific cost drivers.


The system is so transparent that some managers will not approve as they would like to keep some things out of view of the owner

Assigning costs to activities take time , as does identify and tracking costs drivers and assigning costs to products requires a significant amount of time in the accounting department

The problem with the approach is that fixed cost is often a large part of the overhead cost being allocated for example building and machinery depreciation and supervisor salaries.

Evaluate the issues raised by each director


To: Director of Scooter Driver

From: Management Accountant

RE: Evaluate the issues raised by each of the director

The finance director argued that I'm not agree about finance direct Prior to the activity based costing(ABC) method, the existing method method upon direct labor hours gave profit per unit for Rising After implementing ABC method, because that profit per unit for Rising star is lower, higher Road Rider but Fire roll does not gain profit but loss. After the overhead cost allocation based on production activities, different portion of costs are assigned to each of the product. ABC method, then are the quantification of activities performed and theses might include number set-up.

The marketing director argued, I'm not agree about this; because that activity based costing I strongly use full for find that accurate of best cost. Activity base costing price making more use full for the .Activity-based costing assigns costs and product resources to produce unit cost is the average total cost average cost better than traditional costing. Those activity bases costing that can give are rite amount for marketing director average amount.

The managing director argued, I'm not agreeing about this, a cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost. Manager can see that the best way to control costs is to control the activities that generate costs in the first place. That fixed cost are not are same price, normal that change each an every time.

The chairman argued that actually I not accept of this statement because i agree with the statement that provided due to traditional costing and activity- based costing both shows the same profit Fire roll have the largest relative to the three activities. Therefore, overhead costs are higher. The overall effect of the existing method costs rising star and fire roll is below cost and road rider cost is the cost compared to the ABC method. That traditional coating method better than abs, because that abs is more accurate .

(2) The implication of activity based costing for scooter driver and in so doing evaluate the past decades and discuss how had impact on management accounting.

Changing competitive environment

Excellence in manufacturing can provide a competitive weapon to compete in sophistic worldwide market. In order to compete effective companies must be capable of manufacturing innovative product if high quality at low cost and also provide a first class customer services. Organization as those operating in the airline and financial services industry were either government owned monopolies or operated in highly regulated protected and non competitive environment. This organization were not subject to any gate pressure to improve the quality and efficiency of their operation or tom improve profitability by element services or product that were making losses.

In order to compact in today competitive environment company have had to become more customer driven and make customer satisfaction and on over reading priory. Customers are demanding every improving level of service in cost, quality, reliability, delivery, and choice of innovative new products. Identify cost efficiency, quality, time and innovation as the key success factors. In addition to concentrating on this factor organization are adopting new management approached in their quest to archive customer satisfaction.

Impact of competitive environment management accounting

Compare to the increasing competition as also made decision error due to poor cost information more probably and more costly. If the cost system resulted in destroy product cost begin reported, than the overhead cost product willed to higher bid price in business and business loss to those competitor to be able to quote lower price poorly because the cost system produce more accurate cost information. Alternatively there is a danger that under coasted products will resulted in acceptances of unprofitability business.


As firms production become more automated, direct labor is increasingly engaged in setup and supervisory functions rather than performing the work on the product and no longer represents a reasonable surrogate for resource demands by products. Labor frequently works on several different products at the same time which makes it difficult to assign labor hours intelligently to products. Generally, the fundamental objectives of management accounting in an advanced manufacturing environment remain the same as in the traditional manufacturing setting which are to cost products, value inventory, measure performance, and make investment decisions.

Competitive business environment today and advances in manufacturing technology has several implications for accounting. Changes in the pattern of behavior of cost and cost, reduced inventory and reduced emphasis on inventory accounting, the relationship deteriorated standard costing system, changing the nature of capital investment, and the increasing importance of non-financial performance indicators. These implications point towards the need for new management accounting practices to meet the challenges of the new manufacturing environment


The increase in production 47% from the previous year has also increased environmental impacts. The most significant impacts are solvent emissions and waste generation. In particular, the amount of mixed waste has grown noticeably. However, the company's waste recycling rate is still 94%. Soil emissions consist of the mixed waste taken to landfill, and in case of accidents, it is possible that small amounts of chemicals end up in water systems. The company does its best to reduce these impacts by monitoring the emission levels, developing and enhancing activities and correcting detected deviations.

Management of the natural environment is becoming an increasingly important issue to manufacturing firms, yet their managers are also challenged to implement changes that improve competitiveness. To meet this challenge, a new construct grounded in the resource-based view of the firm and manufacturing strategy has been developed: the environmental technology portfolio. The composition of a plant's portfolio--the pattern of its investment in environmental technologies in manufacturing over time--was found to significantly affect both manufacturing and environmental performance for a sample of manufacturing plants.

If toxic substances are used in the manufacture they can eventually contaminate the environment, especially when considering the impact of millions of articles manufactured. There are pathways towards this, including rubbish dumps, storage ponds, gases emitted. Eventually most waste material ends up in the environment, in the soil, in water, in the air, and can be taken up by plants or animals.

Changing Globalization environment

The objective of management accounting is changing. Before the globalization, most corporations are small and mainly relay on home operations. The traditional accounting is always focusing on the domestic rather than the international market. With the deepening of globalization, enterprise scales are increasing and go abroad to service their clients. These multinational corporations, facing the trend and requirement of globalization, have to redesign their accounting systems to satisfy the new global objectives.

As the firm strives to better fit with its environment, and be more successful, sustaining and/or improving current performance has become critical for organizations.

However, very limited study has so far taken place on how competitive business environment and technological advancement has influenced management accounting and organizational change in the context of developing countries. Most empirical evidence in this area has been obtained from research in developed countries. This study intends to show how changes in the external environmental and technological factors in a developing country affect management accounting practices and the internal organization configuration, and whether these changes can contribute to performance improvement by the organization.

Impact of Globalization environment in management accounting

The main of think that of given the scorekeeping of the business, which accumulates and classifies the data and than that Based on the scorecard, internal managers can evaluate the performance of the business. Second, manager accounting supplies significant problem which should be looked into the attention directing. Furthermore, the economic energy of the whole world will be distributed more balanced. In the event, the definition and function of accounting management are changing.

It is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting, and communicating information that helps managers fulfill organizational objectives better management accounting can provide useful information to help a corporation achieve its goals and objectives.

Manager accounting supplies significant problem which should be looked the attention directing. Attention directing regards to giving the manager detail and direct information, which makes them realize the problem, opportunities and challenges of the company.


In the past years, without advanced technology, accounting recognition, accounting record and accounting report were made by hands. These countless data was recorded on paper. It is such a complicated work that an accountant supplied accounting report, which may expand too much time and energy. While today, managers and accountants can sit together with light heart to discuss the available data and integrate the information to help managers make appropriate decision.  Electronic commerce, which conducts business online, is now in widespread use with technological development.



During the past decade the use of information technology (it to support business activity n has Increase the development of electronic business communication technology knows e-business, e-commerce or internet commerce. This development is having a big impact on business. For example, consumer is becoming more when purchasing products or service because they are able to drive more information from the internet of the different product offering. The impact that information technology will have on organizational productivity is also being considered as is its potential impact on the wellness of employees

Information Technology has also had a major impact on the defenses capabilities of governments. This covers both a governments capability to wage war and their intelligence gathering capability. Advances in weapons technology and weapons design have increased the effectiveness of various governments' armed forces. For example it would have been impossible to design aero planes such as the B2 Bomber if it were not for the advances made in information technology. The B2 bomber relies on a continuous curvature design to minimize radar signature. It would have been impossible to design or build this machine without the development of computer modeling techniques.


Organizational are also increases customer satisfaction by providing a speedier response to customer request reducing the time delivery and taken to develop product market Organizational are there focusing on minims cycle time by reducing the time spent on such activity. Organizations are seen as having to deal with physical environments that are changing more rapidly than the organizations themselves. Consequently, the pressure on organizations to adapt and change their structures is immense.

Organizational structures address the organization of work activities, including both personnel and production systems.. Structural change is offered as a means to help the organization evolve. This transition is stimulated by rapid environmental change, increasing complexity and uncertainty and the predominance of loosely coupled organizational components. The contingency theory literature indicates that factors such as technology and the environment affect the design and functioning of the organization.


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