Traditional vs. Activity Based Costing: A Comparative Analysis

This report provides a comparative analysis of traditional costing systems and activity-based costing (ABC) methods, evaluating their strengths and weaknesses in allocating overhead costs. Traditional costing, which often relies on a single cost driver like machine hours, can lead to inaccurate cost allocation, particularly in organizations with diverse products and complex processes. Activity-based costing (ABC) addresses this by assigning costs based on specific activities and their resource consumption, offering a more precise understanding of product costs and process efficiencies. The report argues in favor of ABC for its ability to provide detailed information, improve cost accuracy, and support better decision-making related to production and cost management, while also acknowledging the challenges of implementation, including the need for significant organizational changes and potential upfront costs. The report concludes with a recommendation for organizations to adopt ABC to enhance cost management practices and achieve sustainable competitive advantage. Desklib offers a wealth of similar solved assignments and study resources to aid students in their academic pursuits.

Contents
Introduction:.....................................................................................................................3
Overview of Traditional Costing System.........................................................................3
Arguments in Favour of Activity Based Costing.............................................................3
Arguments against Activity Based Costing......................................................................4
Conclusion and Recommendations...................................................................................5
References.........................................................................................................................6

Introduction:
In the ferocious aggressive globe, it is applicable to the associations to manage and
decrease costs however to a great extent as could reasonably be expected. The reductions in
the expenses gives an extension to the organization to charge bring down costs so as battle in
the market with the contenders. In the pith, the cost assignments techniques, for example,
conventional and ABC have been examined in the report. The essential target of this is to
give suggestions to administration as respects substitution of traditional method along with
ABC method (Weygandt, Kimmel, and Kieso, 2009).
Traditional Costing System Overview
Traditional costing method of managerial costing utilizes just a single driver to allot
overhead cost. The portion of overheads is prepared firstly to the administration office then
after that the indirect expenses are allotted to the manufacturing office, in traditional method
arrangement of overhead assignment. The significant issue with the conventional overhead
portion framework was along with the utilization of title. Further, it has been found that the
machine hours are not a proper base to allocate the cost (Zeuner, 2013).
Arguments in Favour of Activity Based Costing
Keeping in mind the end goal to correct the wrong allocation of expenses which is done
in the traditional method; a strategy in particular ABC came into the scenario in the market.
The ABC made it conceivable to relegate the expenses cost based upon the utilization of
specific action. Further, the ABC likewise created feasible to it for the administration to
manage and contemplate the business forms. The portion of expenses costing has turned out
to be inescapable for the associations having enormous measure of overheads in light of the
fact that a misallocation of cost could be harmful for the company. Subsequently, to stay

focused and accomplish a supportable development in the aggressive world, the usage of
ABC is relevant (Zeuner, 2013).
The ABC gives precise reason to allocate the cost to the production department of the
company. The drivers which allocates the cost are relegated for every action, in view of
which the expenses brought about on exercises that is assigned to the items &
administrations. The action based costing is worthwhile from numerous points of view as
enrolled underneath:
• Provides better and detailed information for allocation base
• More precise portion of the overheads (Toomey, 2012).
• The competitive costs could be accomplished well by applying action based costing.
• Better basic leadership identified with generation increment or abatement.
Arguments against Activity Based Costing
In spite of the fact that, the acceptance of ABC is invaluable to business however it
needs generous alterations in the current procedures & condition. The execution of ABC
causes bureaucratic change that could affect the business (Zeuner, 2013). More, the business
adjustments procedures might likewise require the organization to bring about immense
consumption on framework. It has been found that the ABC is fundamental for business;
however it needs different arrangement and technical changes and immense measure of
consumption.
Conclusion and Recommendations
In this manner, in view of the general exchange, it could be reasoned that the ABC is a
superior method to allocate the cost than the traditional method. Henceforth, administration is
prescribed to receive the ABC method.

References:
Toomey, J. (2012). Inventory management: principles, concepts and techniques. Springer
Science & Business Media.
Weygandt, J.J., Kimmel, P.D., & Kieso, D.E. (2009). Managerial accounting: tools for
business decision making. John Wiley & Sons.
Zeuner, P. (2013). Activity-based costing. GRIN Verlag