Activity Based Costing vs Traditional Method

This assignment analyzes the effectiveness of activity based costing (ABC) compared to traditional costing methods. It discusses how ABC provides a more accurate and detailed breakdown of indirect costs, leading to better decision-making in business schools and various industries. The assignment also refutes the claim that ABC cannot be applied in a business school setting, highlighting its benefits in calculating service costs and informing pricing strategies.

Running head: COST ACCOUNTING 1
Cost Accounting
Student’s Name
University’s Name

COST ACCOUNTING 2
Statement 1: “Activity cost does a better job of allocating both direct and indirect cost than
traditional methods”
The statement one is true. Costing is done in businesses to determine the cost of
manufacturing any product or services and calculate the profit generated by the product or the
services provided. Basically, there are two methods traditional method and activity based
costing (ABC) that allocates the indirect costs to the products or services. Assigning of costs is
based on adding the resources used by these activities and the activities that go along with them
(Business Case Analysis, 2017).
Presently, more and more companies are moving towards ABC method to get a better
understanding of goods and services. Traditional costing is easier mode as it relies solely on
adding average overhead costs and thus may distort or hide information. On the contrary, ABC
is more accurate as it provides more detailed and precise breakdown of indirect costs. Business
schools are more inclined towards using ABC to identify products that are not profitable, to
improve the efficiency of products, eliminate the unnecessary overheads, and help in accurate
breakdown of cost information.
Statement 2: “Activity cost cannot be applied in a business school”
Activity costs cannot be applied in business schools is untrue. ABC can help business
schools accurately calculating the cost of services. It can enable business schools in identifying
annual fees. At times traditional costing ends with significant over costing or under costing. ABC
and traditional accounts ultimately assign direct and indirect costs but calculate it differently.
ABC provides detailed information that facilitates planning, designing, implementing which
ultimately brings improvements and drives profitability. ABC demonstrates where to adjust

COST ACCOUNTING 3
pricing by revealing unnecessary or inflated costing. Thus, it can be said that ABC does better
job of allocating prices. Although, it is complicated and expensive but gives precise detailing of
costs which can prove to be beneficial in planning and in making evaluation of processes and
making improvement initiatives (Wilkinson, 2013).
References
Business Case Analysis. (2017, September 21). Activity Based Costing and ABC Management.
Retrieved september 22, 2017, from https://www.business-case-analysis.com/activity-
based-costing.html
Wilkinson, J. (2013, July 23). Activity-based Costing (ABC) vs Traditional Costing. Retrieved
september 22, 2017, from https://strategiccfo.com/activity-based-costing-abc-vs-
traditional-costing/