Modern Costing Methods vs Traditional Costing Methods

This presentation provides insights into the differences between modern costing methods and traditional costing methods. It explores the implications of these differences on decision making and discusses how ABC analysis can help solve monetary problems in companies. The presentation also describes strategic options for addressing problems revealed through ABC analysis and explains how overheads are allocated in organizations adopting ABC.

Accounting Presentation Project

Introduction
 In the recent times, with the motive to make optimum use of financial resources and thereby
reduce cost, companies lay focus on the adoption of modern budgeting or costing methods over
others.
 The present PPT is based on the case scenario of Classic pen company which involved in
manufacturing black and blue pens. Now, firm is planning to manufacture red and purple pen with
the motive to explore operations and thereby enhance sales.
 In this, presentation will provide deeper insight about the aspects on the basis of which modern
costing system differs from traditional one.
 Further, PPT will shed light on the manner in which company’s monetary problem can be solved
using ABC analysis.

1. Identifying main causes for difference in the profitability from using of ABC analysis in comparison to the traditional
costing
The difference in the values of profits occurs in ABC and traditional costing systems
because it is indicated that ABC systems highly relies on greater variety and the number of the second
stage drivers of cost.
•It means that ABC makes use of both non-volume and volume based cost drivers. In comparison to
this, traditional systems uses the cost drivers that volume based.
•ABC systems having greater no of the cost centres as compared to traditional costing systems. In first
stage, traditional costing systems allocates an indirect costs to the cost centres.

2. Implications of such findings on decision making of managers
Implication of the difference between traditional and activity based costing reflects that former system
tend to rely highly on the arbitrary allocations of an indirect costs. Particularly, they rely on the volume
based allocations that in turn affect managers decision making.
•ABC is the technique that is often act as the part of the broader organisational change, further this
complicates quantifying ROI from contribution of every component for the change programme.
•ABC helps the managers of in ensuring benefits and the costs in an adequate and appropriate manner.

3. Describing the strategic options that a company is having for addressing
problems that are revealed through ABC analysis
By doing assessment, it has identified that Classic pen can resolve issue pertaining to increased
production stoppage and overhead allocation by using ABC analysis in the following way:
•ABC guides an efforts in adapting the business strategies for meeting the competitive pressures and in
improving the business operations. Cost related information is utilised by the management ensuring
control on operations and in strategic planning.
•Accuracy of the traditional cost report for the decision making limits only to the financial purpose.
Under an umbrella of the overhead costs, rides to an illusion of the lower cost of product.
•This results to tendency for producing lot sizes and in continuing for an unprofitable product lines.
Developing relational database software tool like activity based driver which helps in addressing the
cost allocation problem under ABC costing system.

4. Report on the way in which overheads are been allocated in organization
and reflecting on ABC adoption
• Allocation of overhead cost under ABC is made directly to the products through multiplying
predetermined rate of overhead for every activity with that of level of the cost driver activity that
are been used by product.
• In the context of Classic pen company, overheads are allocated considering 300% of direct labour
cost.
• It ahs assessed that adoption of ABC helps in Classic Pen in avoiding under and over applied
overheads. It helps in proper allocation of the cost to each and every activity so that cost can be
ascertained accurately.

Conclusion
 By summing up this PPT, it can be concluded that ABC analysis presents suitable view of cost and
profit as it considers both fixed and variables expenses associated with production.
 Accordingly, Classic Pen is advised to employ modern costing method which in turn facilitates
optimum allocation of overhead expenses.
 It can be summarized from the evaluation that through undertaking ABC analysis manager of
Classic Pen can assess and remove redundant activities. In this way, problem pertaining to
overhead expenses can be removed by applying modern costing method.

References
Najjar, P. A., Strickland, M. and Kaplan, R. S., 2017. Time-driven activity-based costing for surgical
episodes. JAMA surgery. 152(1). pp.96-97.
Hoozée, S. and Hansen, S. C., 2018. A comparison of activity-based costing and time-driven activity-
based costing. Journal of Management Accounting Research. 30(1). pp.143-167.
Zhuang, Z. Y. and Chang, S. C., 2017. Deciding product mix based on time-driven activity-based costing
by mixed integer programming. Journal of intelligent manufacturing. 28(4). pp.959-974.