ABC v/s Traditional Costing

This case study compares the traditional costing approach with activity-based costing (ABC) for cost determination in Danbake Ltd, a medium-sized bakery business. The results of both methods are evaluated to identify which method provides better and realistic results. The study concludes that ABC approach is more reliable and appropriate for cost management as it offers more realistic results by allocating the overheads cost to the products on a reasonable basis than traditional costing.

Running Head: ABC v/s Traditional Costing

ABC v/s Traditional Costing 1
Introduction:
The present case is the case of a company Danbake Ltd which is dealing in the bakery
business. The firm is operating as a medium sized business. The firm has been using
traditional costing approach to determine the cost of its products. The selling price of the
products is based on the cost determined for each unit of the product. However, to achieve
accuracy of its cost information, the firm is planning to adopt advanced management
accounting technique i.e. activity based costing which will allocate the overheads on the most
reasonable basis. The results under both the methodologies will be evaluated then to identify
which method provides better and realistic results.
Part 1
Cost determination under traditional costing
Overhead Allocation Park Pie Game Pie
Total production overheads $ 4,83,000.00 $ 3,22,000.00 $ 1,61,000.00
Total Batches 1050 (460*700) (460*350)
$ 460.00
Overhead Allocation Park Pie Game Pie
Raw Material $ 84,000.00 $ 63,000.00
Production Overheads $ 3,22,000.00 $ 1,61,000.00
Total Cost 406000 224000
No. of Batches 700 350
Total cost per batch $ 580.00 $ 640.00
Selling price per batch $ 1,160.00 $ 1,280.00
(580*2) (640*2)

ABC v/s Traditional Costing 2
Part 2
Cost
Activity Cost Driver
Cost
Pool Park Pie
Game
Pie
Total
Quaunt
Quantu
m
Per
unit
cost Park Pie
Game
Pie
Raw
Material Cost 147000 84000 63000 147000
$
84,000.0
0
$
63,000
.00
(700*120):
(350*180)
Pie
Preparati
ons
Weight of
Ingredients 316200 140000 87500 227500 1.39
$
1,94,584
.62
$
1,21,6
15.38
(700*200) :
(250*350)
Oven
Preparati
ons
Number of
firings 16674 700 350 1050
15.8
8
$
11,116.0
0
$
5,558.
00
Baking
Number of
oven hours 24000 2100 900 3000 8.00
$
16,802.8
0
$
7,197.
20
(700*3):
(350*2.57)
Others
Batch
Preparation
Time 126126 1260 742 2002 63
$
79,380.0
0
$
46,746
.00
(700*1.80):
(350*2.12)
Total Cost
(Under
ABC
methodol
ogy)
$
3,85,883
.42
$
2,44,1
16.58
No. of
Batches 700 350
`
Cost per
batch
$
551.26
$
697.48
Selling
Price Per
batch
$
1,102.52
$
1,394.
95

ABC v/s Traditional Costing 3
Cost allocation under Activity Based Costing
Part 3
From the results of both the methods of cost determination, it can be observed that traditional
costing is overall valuing Park Pie and under valuing game pie in comparison to the cost
determined under Activity Based Costing Methodology. The inconsistency in the results
under both the methodologies is due to change in the manner of cost allocation to both the
products. It can be seen that ABC approach has identified each activity that is necessary for
the manufacturing of the products and allocated the cost to those products on the basis of
resources consumed in such activity for the production. Therefore, all the overhead costs are
allocated to each product on the reasonable basis. Whereas in traditional costing, the costs are
allocated on the basis of predetermined overhead rate taking into account overall overheads
incurred and the total number of batches of the products produced (Horngren, Bhimani,
Datar, Foster & Horngren, 2002). Hence, it could be said that ABC approach is providing
more reliable results of product cost.
Part 4
Danmake Ltd must change its method of cost determination for the products dealt by it so as
to achieve accuracy in the results of the cost determination method. it should immediately
switch over to activity based costing methodology from traditional approach to allocate its
production overhead (Hansen, Mowen & Guan, 2007).
Conclusion:
From the above case of Danmake Ltd. it can be said that Activity based costing approach is
more reliable and appropriate cost management technique as it offers more realistic results by
allocating the overheads cost to the products on reasonable basis than traditional costing.

ABC v/s Traditional Costing 4
REFERENCES:
Hansen, D., Mowen, M., & Guan, L. (2007). Cost management: accounting and control.
Cengage Learning.
Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T.
(2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.