Accounting and Finance: Traditional Model, Marginal Costing, and Activity Based Costing

Running head: ACCOUNTING AND FINANCE
Accounting and finance
Name of the student
Name of the university
Student ID
Author note

ACCOUNTING AND FINANCE 1
Table of Contents
Traditional model for costing.....................................................................................................2
Marginal costing.........................................................................................................................2
Example..................................................................................................................................3
Limitation of marginal costing...............................................................................................3
Decision making.....................................................................................................................4
Activity based costing (ABC)....................................................................................................4
Example..................................................................................................................................4
Limitations.............................................................................................................................6
Decision making.....................................................................................................................7
Reference....................................................................................................................................8

ACCOUNTING AND FINANCE 2
Traditional model for costing
Traditional costing is the assignment of the overheads to the products based on the
volume or consumption of production resources. as per this method the allocation is generally
made on the basis of uses of machine hours or consumption of direct labour hours. Major
disadvantage of the traditional approach is that the overhead may be higher as compared to
the allocated overheads and therefore small changes in consumption triggers massive changes
in the overhead application. However, the technological advancement in the manufacturing
sectors reduced the requirement of labour. Further, this system does not consider the other
cost drivers of the production process. Hence, it leads to inefficient decision making
approaches by the management. Therefore, using the labour hours for allocation of overhead
has become outdated and the management that uses the traditional costing approach are
facing various criticisms in the recent years.
Various other methods that can be used as against the traditional approach are the
marginal costing approach and activity based costing approach that allocates the overhead in
systematic basic rather than using the labour hrs or machine hours for allocating the
overheads.
Marginal costing
It is an accounting system under which the variables expenses are debited to the units
of cost and fixed costs for the period get adjusted in full against the aggregate contribution.
The marginal cost is the variable cost of the product and the marginal cost of production of
the product is the entire direct material cost, direct expenses, the cost of direct labour and
variable cost of production overhead (Simpson et al. 2013). Therefore, with increase of sales
and volume of production the total variable costs also go up proportionately.