Management Accounting I - Conventional Costing vs Activity Based Costing

Management Accounting I

Table of Contents
MAIN BODY..............................................................................................................................................................................................3
REFERENCES............................................................................................................................................................................................1

MAIN BODY
Part A Case Study
1
Conventional costing and activity based costing are two different methods of accounting by which indirect costs of the
products are allocated to such products. Both of these methods are used to determine the production related overhead costs and
allocate it to products on the basis of cost –driver rate. The difference between the two methods are because of their complexities and
accuracy they give. Conventional costing is simple and less accurate while activity based costing is complex and have high accuracy.
The conventional costing assigns indirect costs to products on the basis of average rate that is capricious while in ABC costing
overheads are allocated to activities then to products on the basis of their activities usage, hence the accuracy is high.
There are various advantages that company can have if it uses activity based costing. To begin with the product cost derived
from ABC method is accurate. Adapting to this method brings reliability and accuracy in company’s costing method. This method is
focussed on relationship between cost and effect for incurrence of cost (Quesado and Silva, 2021). The basic idea that the method
follows and forms the basis is that the cost is incurred for the activities and not consumed by the products. A manufacturing
environment that consists of advancements in large amounts out of the total costs this particular method is used to get product costs in
a realistic manner. In firms where there are great diversities in the type of products or services offered or manufactured correct cost to
each can be determined (Al-Dhubaibi, 2021). Further the information about the cost function is gathered from this method. The real
cost nature can be identified and cost reduction becomes easier to identify such activities that are performed by the manufacturing firm
but does not add to the products’ value. The fixed overhead costs can be controlled using ABC method by the managers.
2
Total Overhead Calculation
Overheads $
Staff Support 180000