Cost Accounting Vs Activity Based Study

947 Words 4 Pages
A cost accounting system is a process or a method used by a business to estimate the cost of their products and to determine how a firm utilizes and earns funds. It aids management in making decisions and in the planning and control of an organization. All types of businesses, whether service, manufacturing or trading, healthcare, require cost accounting to track their activities. Therefore, different firms follow different methods for verifying cost accounting. This paper focus on activity based costing (ABC) method that is used in two of the studies described in this paper and advantages and disadvantages associated with the method as well as associating accounting information to financial management for improvement of a firm.
The activity-based
…show more content…
Because cost drivers relate to cost changes, measured or quantified amounts of cost drivers are excellent bases for assigning resource costs to activities and for assigning the cost of activities to cost objects. ABC is an economic model that identifies the cost pools or activity centers in an organization and assigns costs to cost drivers based on the number of each activity used. It is designed to assign current prices, direct labor hours to produce each of the items, their material costs, and annual production quantities. This study compares the data using traditional cost accounting method (TCA) and true cost calculation by activity based costing (ABC) method for automobile parts. In the case of Part 'A ' cost calculations, traditional costing accounting shows a margin of 25.41 % compared to ABC method margin to 27.49% (Kumar and Mahto, 2013). For Part 'B” TCA indicates the margin 27.5% and ABC margin to 25.14%. Part ‘C’ TCA 35.18% and ABC is 34.66% (Kumar and Mahto, 2013). Therefore, Part ‘A” showed more profit as compared to TCA cost calculation. True cost calculation by ABC method shows that the part C has the best margin but it is less than the TCA margin, which is 34.66 % (Kumar and Mahto, 2013). To conclude, activity based costing method gives the true costs of the parts compared to traditional cost accounting

Related Documents