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Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University


Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University

Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University:- we will provide complete details of Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University

Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University

Costing is used in business accounting strategies as a way of determining the cost of manufacturing a product in relation to the revenue generated by that product. Costing systems determine the overhead of production and then allocate those overhead costs to a business’ products.

There are two common methods for allocating these indirect costs to products. Both of these methods assess overhead costs and then attach these costs to products based on certain cost drivers. A cost driver is any component that costs money or any factor that is related to a cost occurring, such as the volume produced or the number of labor hours.

The first of these methods is activity-based costing, which is sometimes referred to as “ABC.” Activity-based costing determines all activities associated with production, assigns a cost to those activities and then determines the cost of the product.

The other method is traditional costing, which assigns costs to products based on an average overhead rate. This method pools all indirect costs in production and applies those costs equally across the board using one appropriate cost driver, such as machine hours.

Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University:-ABC vs. Traditional

Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It’s also more thorough and considers non-manufacturing expenses as well, such as administrative and managerial costs.

Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in non-manufacturing expenses or determine which overhead costs actually affect specific products.

A simple example of these costing methods can be demonstrated with the costs of living in an apartment with roommates. Two roommates in an apartment will typically split the costs of rent, utilities and groceries, and they have a couple of options for doing so. They could simply total the cost of all of the bills and divide it exactly in two. This would be similar to traditional costing.

The roommates also have the option of determining who uses specific utilities and paying only for what each one uses. They can then create an itemized bill for each roommate. For example, if one roommate doesn’t use the internet and the other doesn’t use cable, they won’t have to pay those parts of the bill. This method is similar to activity-based costing.

Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University:-Which Should You Use?

Both forms of costing have various benefits as well as disadvantages. Determine which form of costing will be best suited for your project by considering your specific needs and your time frame.

Activity-based costing should be used when accuracy is crucial, because it is the most precise. Although it is costly to implement, it should be used for:

  • Times when overhead is high, because small changes in each product cost can make a large difference overall. This method makes it easy to visualize and understand all indirect costs and activities.
  • Internal use, because decision-makers will be able to see all relevant spending and can document all indirect costs accurately. This method is good for finding areas of wasteful spending.

Traditional costing should be considered when time is limited or when accuracy won’t be affected much by production activities. Traditional costing is most effective for:

  • Times when overhead is low compared to the direct costs, because this is when it will be the most accurate. This works well when there are a large number of similar items (or a single item) being produced.
  • External use, because it will be easier for outsiders to determine the value of products.

Choosing appropriately between activity-based and traditional costing methods won’t be easy, but it’s a decision that shouldn’t be neglected. Taking the time to understand how each method affects your business could help you save money in the long run, leaving you with extra money to reinvest where you see fit.

Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University

ABC vs Traditional Costing

The difference between ABC or Activity Based Costing and TCA or Traditional Cost Accounting is that ABC is complex whereas TCA is simple.

The ABC system began in 1981 whereas TCA methods were designed and developed between 1870 to 1920. In the TCA system, the cost objects and used up resources are required to evaluate the cost whereas in the ABC system the cost is dependent upon the activities used up by the cost objects.

Activity Based Costing is accurate and preferred over the TCA cost management system. The ABC method of cost management system is adopted when the overheads of the company are high and there are large numbers of miscellaneous products. Inaccuracy or errors are most unwanted and undesirable because of the competitive rates set by the competitors in the market. Due to this heavy and stiff competition, a highly reliable and accurate method is required for the cost management.

TCA or Traditional Cost Accounting uses a single overhead pool and is not able to calculate the true cost. The costs of the objects are allocated randomly based upon the labor or machine hours etc. ABC costing includes identifiable products parts or labor whereas TCA arbitrarily accumulates expenses, salaries, depreciations etc.

Smaller targeted costs that are built upon activities are calculated with the help of the ABC system. The ABC system is advantageous since it helps in simplifying the decision making process and it makes management concepts become clear and target -oriented. It also helps in evaluating performances and sets standards which can help the manager to use this information for comparison purposes.

In the Traditional Cost Accounting System, the company determines the cost of production after the products have been produced whereas in the target or Activity Based Accounting System, the value or cost of the product is determined on the basis of customer feedback and pocket range. The ABC system helps the company to determine whether to lower or raise the activities cost to grab the consumers. The ABC system also helps in keeping up with the competitors without sacrificing the quality and the quantity of the products.

Summary:

1. Traditional cost accounting is obsolete whereas Activity Based Accounting is used more by various target-oriented companies.

2. ABC methods help the company to identify the needs of keeping or eliminating certain activities to add value to the products.

3. TCA methods focus on the structure rather than on processes whereas ABC methods focus on the activities or processes rather than on the structure.

4. ABC provides accurate costs whereas TCA accumulates values arbitrarily.

5.  TCA is almost obsolete whereas  ABC methods are largely in use since 1981.

Traditional Costing System vs ABC for Managerial Accounting Mcom Delhi University

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