The Activity Based Costing System Assignment Example | Topics and Well Written Essays - 2500 words

The Activity Based Costing System - Assignment Example ta for input may be used differently according to different methodologies of the costing information system which may result in the production of varying outputs of information. A costing system is aimed at generating information to find ways to minimize waste in production. It should be taken care of that the benefits that are derived from the costing system should be higher than the resources used in designing, implementing and maintaining the costing system so that wastage is minimized. It is important to understand the fundamental working of the two systems i.e. The Traditional Costing System and the Activity Based Costing System in order make a comparison between the two. The traditional costing system The traditional costing systems use a single cost driver which is based on volume. Due to this reason, the traditional costing systems tend to distort the cost of the products. ... ies, the correct proportion of activity actually used for a specific unit of product is not exactly corresponding with one single cost driver (Akyol, 2012, p. 64). The conventional cost accounting system uses a volume based driver like the number of machine hours or the number of direct labour hours for assigning all the overhead costs incurred in the manufacturing process. But in almost all modern companies, the production process uses a combination of technology and manpower thus incurring overhead costs for both. But in the traditional costing model, the cost of goods sold is based on absorption costing and includes only the product costs as described in financial accounting. Therefore, the traditional costing model assigns the costs directly to the products before assigning costs to the activities involved in producing the product units first. The results generated thus a report about the information on the amounts spent on the product units but they do not give the reason as to why they are spent. This costing system is based on the application of costs to indirect cost drivers and the indirect costs are generally based on financial cost drivers. The traditional costing model uses a system in which the total costs incurred in the production is divided among the different products thus produced. Therefore, all the costs incurred in the production process have to be allocated to one or another product. The traditional costing model has the disadvantage that if overhead costs are cut down for reducing the total costs, only the signs of high cost are treated and the cause behind the higher costs remain unaltered. Also, the reduction of overheads is likely to result in the reduction of the quality of the products rather than in long term decrease in the cost incurred