Yummy Company Case Study

Yummy company was currently using traditional absorption costing (TAC) to manage its company to improve the efficiency of the organization. However, this costing method is not encouraged to use because it cannot give an accurate and realistic overhead absorption into its products and services. Yummy company are encouraged to choose the other alternative costing method which is Activity-based costing (ABC). This costing method can improve the organization's efficiency better and more appropriate to use. So, I would like to discuss what are these two types of costing system is and how should we apply them for a company. First and foremost, a traditional absorption costing (TAC) is defines as a technique of ascertaining costs. It is a strategy to reassign all the costs in both variable and fixed to operations, processes and products. There are six steps of processes to apply a TAC method. Firstly, yummy company should identify their indirect costs. Next, they should estimate indirect cost with time period in month, quarter or year. Then, determine a cost-driver which can link to the cost such as labour hours or machine hours. After that, estimate an amount for the cost-driver and estimate with appropriate time period. For example, how much labor hours per quarter is …show more content…
Companies which like to use TAC method because it is easy and simple to implement the adjustment of overhead costing. Furthermore, it is aligned with generally accepted accounting principles (GAAP). Besides, TAC method helps companies to calculate the absorption costing for file taxes or other official reports. Moreover, traditional absorption costing takes account of costs of production such as fixed costs of operation, salaries, facility rental and utility bills. It can show the cost per unit for a product line very clearly. This can help company management in determining the products' prices and evaluating