Activity-based costing vs. Traditional Costing

This report discusses the differences between activity-based costing and traditional costing methods and how they impact unit manufacturing costs. It provides an example of the World Gourmet Coffee Company and explores the reasons for using activity-based costing in certain situations.

Running head: REPORT 0
MANAGEMENT ACCOUNTING
MAY 15, 2019
STUDENT DETAILS:

REPORT 1
Contents
Introduction...........................................................................................................................................2
Activity-based costing vs. Traditional Costing......................................................................................2
Conclusion.............................................................................................................................................3
References.............................................................................................................................................4

REPORT 2
Introduction
The corporations require the accounting systems to track the cost of the functions of
organisation. Mostly, there are two systems such as activity-based costing and traditional
costing. One of these two systems is very easy to utilise and cheap to implement, when other
costs more to utilise however, renders the great exactness. In the following parts, why unit
manufacturing cost differs using Activity based costing compared with a traditional approach
is discussed and critically examined.
Activity-based costing vs. Traditional Costing
The traditional costing method and ABC method evaluate the overhead cost and then assign
the costs to the goods, which are depended on certain cost drivers. The cost drivers are the
elements that cost money or are the factors, which are related to a cost taking place such as
volume manufactured or labour hours (Ahadi and Azar, 2016). ABC method defines the
functions related with the manufacturing, allocates the cost to these functions, and then
measures cost of the products. Other method is traditional costing method that allocates costs
to the products depended on an average rate related to overhead. The traditional costing
method pools the indirect costs for production and relates the cost similarly across the board
utilising one relevant cost drive such as machine hours. Because of the differences between
traditional costing method and ABC method, the unit manufacturing costs vary using these
methods (Cooper, 2017).
The World Gourmet Coffee Company is a good example to understand these two methods.
The main cost of World Gourmet Coffee Company is famous distributor of different
composites of coffee. The main costs of this company are raw material. However, there are
the significant amounts of the production overhead in a principally mechanical roasting
procedure as well as packaging procedure. World Gourmet Coffee Company utilises
comparatively little direct labour (Bliss, 2017).
Further, certain coffees of this company are very famous and sell in the great volume, when
the certain new blends have very lower volume. The company makes the prices of the coffee
at whole cost of production, involving assigned overhead, and the thirty per cent mark up. If
the price for some coffees is relatively high in comparison of the market, adjustment is made.
The corporation fulfils chiefly on the product’s quality, however customer is price-conscious

REPORT 3
as well. In this way, the management is utilising the activity-based costing method to
determine if this will state the changed structure of cost for 2 products. Hence, it is believed
by the controllers of this company that the traditional product-costing system can be
rendering confusing and false information related to cost (Babu and Masum, 2019).
Conclusion
As per the above analysis, it can be concluded that selecting properly between a traditional
costing methods and activity-based methods will not be simple; however, this is a decision
that must not be ignored. As unit manufacturing costs differ because of these different costing
methods so it is required to know that how both the methods influence the business. It is
required to consider that which method will be useful to keep currency for a long period.

REPORT 4
References
Ahadi, A. and Azar, S.F. (2016) The study of the possibility of using activity-based costing
system (ABC)(Case Study: General Directorate of Roads and Urban Development of East
Azerbaijan Province). International Academic Journal of Accounting and Financial
Management, 3(6), pp.1-8.
Babu, M.A. and Masum, M.H. (2019) Crucial Factors for the Implementation of Activity-
Based Costing System: A Comprehensive Study of Bangladesh. ABC Research Alert, 7(1).
Bliss, S. (2017) Coffee interconnections. Geography Bulletin, 49(4), p.55.
Cooper, R. (2017) Target costing and value engineering. New York: Routledge.