Traditional costing versus Activity-based costing Advantages and disadvantages
Costing systems are the programs that supply information about the value of direct labor hours and numbers of units produced. With the help of data such as product cost, the managers can generate estimation of cost associated with different activity carried in the organization. The costs systems operate by taking total cost as basic for calculation. Costing is essential for every organization, as every manufacturing and other department has to be assigned accurate budget for proper operation (Hansen, Mowen and Guan, 2006).
Costing system provide information that is useful to managers for minimizing waste and allocating resources to different departments.
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The Traditional cost system depends largely on the volume variance. The volume variance is measured as the cost of labor and machines used for manufacturing the number of items. If number of item produced are less than the expected, then actual cost are likely to increase. This means the labor and the overheads used in manufacturing of products were not planned in proper manner. On the contrary, activity based costing system provides impeccable focus on the manufacturing of product. According to Hall (2008) many companies in US and UK and China have adopted activity based costing system, with the help of this system the managers of account and other department should keep separate tracks of costs differently. This is required to manufacture individual units in such manner that product design is manufactured in batches and manufacturing facility operates in efficient manner. Taking into consideration, the discussion activity based costing system is gives focus on overall organizational activities and traditional cost system focuses on individuals and machineries. Hence, use of activity cost system can be managed more efficiently than standard costing system (Daly, 2002).
The main motive of activity and traditional cost system is increasing profits. Traditional cost system focuses on large volume production of products, which is impossible if there is keeps on focusing on simple factors direct material, labor, and operational overheads. However, if there is