Traditional Costing Produces Accurate Peer Replie

STUDENT
1: Rachel

Companies
need accounting systems to track the costs of their operations. Two of the most
commonly used systems are traditional costing and activity-based costing. One
of these is easy to use and inexpensive to implement, while the other costs
more to use but gives you greater accuracy. Traditional costing adds an average
overhead rate to the direct costs of manufacturing products. The overhead rate
gets applied on the basis of a cost driver, such as number of labor hours
required to make a product. Traditional costing is best used when the overhead
of a company is low compared to the direct costs of production. Activity-based
costing identifies all of the specific overhead operations related to the
manufacture of each product. Not all products require the support of all
overhead costs, so it is not reasonable to apply overhead costs to all
products. Accountants created the ABC method to solve the problems of
inaccuracy that result from the traditional costing approach. Managers needed
more accurate costing methods to determine which profits were actually
profitable and which were not. (Horngren, 2014).

Deciding
between traditional or activity-based costing is not easy. The choice should
depend on the purpose of the reporting and who will see the information.
Managers need accurate product costs and prefer to use an activity-based
accounting system. Even though this system is more costly, it provides better
information that will enable managers to make more profitable decisions in the
long-term. For external reporting, companies still use the traditional costing
system, but it is becoming obsolete as outsiders demand more accurate
information about businesses. (Horngren, 2014).

ABC
can be applied to any company that has manufacturing operations, and is
commonly used in automobile manufacturers and power companies. In recent years,
ABC has also been employed in service companies, government entities, and other
non-manufacturing organizations. Essentially all organizations employ processes
and activities to convert capital and resources to products or services. ABC
attempts to examine each business process or activity and break it down into
discrete components. For example, a business school may divide its accounts
payable operation into several activities: interacting with purchasing,
receiving the invoice, coordinating with the vendor, releasing the check, and
handling any return issues. Identifying and quantifying the costs of these
processes and activities is the essence of ABC. (Emblemsvåg, 2003).

-Rachel

References

Emblemsvåg,
J. (2003). Life-cycle costing using activity-based costing and Monte
Carlo methods to manage future costs and risks. Hoboken, N.J:
Wiley.

Horngren,
C. T., Datar, S. M., Rajan, M. V. (2014). Cost Accounting.
[VitalSource Bookshelf]. Retrieved from https://bookshelf.vitalsource.com/#/books/97813234…

Student 2: Christopher

Hello
Class,

Traditional
costing is best used when a company’s overhead is low, in correlation with the
direct costs to produce products. When production volume is high, traditional
costing produces accurate cost figures. When it comes to traditional costing,
organizations will normally use the method when it is formulating external
reports. This is because it is usually easier for outsiders to comprehend. The
flip side to that coin is, it lacks an accurate picture of product costs. This
is largely due to the overhead rates being applied evenly to the cost of all
products.

Activity
based costing recognizes all specific overhead operations related to the
manufacture of each product. One of the differences between traditional and
activity-based costing, is that with activity based, its method grows the
amount of indirect cost pools that can be allocated to specific products. With
traditional, as mentioned above, it takes one pool of a company’s total
overhead costs and allocates it evenly to all products. This method, is the
most accurate, but is often difficult to do and is also quite expensive.

Our
discussion this week, asked us if we agreed that activity based is better at
allocating (in regards to direct and indirect cost), better than traditional.
Yes, activity based does better job than traditional, because it is more
accurate and traditional is becoming more obsolete, based on companies and its
mangers, wanting more accuracy. Activity based also requires a lot of
knowledge. The method also alters the nature of several indirect costs, making
costs previously considered indirect – such as depreciation, inspection,
or power – traceable to certain activities. It also transfers overhead costs
from high-volume products to low-volume products, raising the unit cost of low-volume products.

Reference:

https://quickbooks.intuit.com/r/pricing-strategy/a…

https://www.business-case-analysis.com/activity-ba…

ORIGNAL
QUESTION: Activity based costing does a better job of allocating both
direct and indirect cost than traditional methods do. Activity based costing
cannot be applied in a business school. Are these statements true, false, or
uncertain? Explain the reasoning for your answers.