Abc Costing

“Activity-based costing systems yield more useful and accurate information than conventional costing systems because they use more cost drivers to assign support costs to products.” Do you agree with this statement? Explain.

Yes, I agree with this statement. ABC costing systems are used over traditional methods to more accurately measure product/service costs.

What is activity-based costing?

ABC costing measures the resources used to produce a product or to provide a service. It uses actual direct material cost, actual direct labor cost, and both manufacturing and non-manufacturing overhead costs actually incurred to produce the product/service.

How does it differ from conventional costing methods?

• Non-manufacturing and manufacturing costs can be assigned to each individual activity / product / service, instead of an aggregate measure for several activities

• Overhead costs can be allocated to each activity and can be based on the level of actual activity, rather than budgeted capacity

• Allocation bases used differ from conventional based methods

Eg. Producing and distributing a car

Traditional Costing ABC Costing

Employee pay $2,300 Compute requirements $300

Purchasing costs $1,500 Purchase parts & materials $1,500

Manufacturing costs $7,000 Store parts & materials $800