Monash University ACW2391: Comparison of Costing Methods Analysis

This report provides a comparative analysis of two primary costing methods: Activity-Based Costing (ABC) and traditional costing. It begins with a brief introduction to costing techniques and their significance in assessing the value of inputs and outputs within a manufacturing process, highlighting their importance for managerial decision-making. The report then delves into the similarities and differences between ABC and traditional costing, emphasizing the complexity and accuracy of ABC compared to the simplicity of traditional costing. The advantages and disadvantages of each method are thoroughly discussed, including the ease of implementation and cost-effectiveness of traditional costing versus the accuracy and precision of ABC, despite its complexity and cost. The report concludes by acknowledging the challenges in choosing between the two methods, suggesting that the choice depends on the reporting purpose, with ABC often preferred for its accuracy in managerial decision-making, even if it's more expensive. The report references various sources, including academic journals and business publications, to support its analysis.

COMPARISON OF METHODS OF COSTING
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SUBJECT: COMPARISON OF METHODS OF COSTING

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Brief introduction:
The costing techniques are the methods of accounting which are used by the company to help
assess the value of the inputs and value of output in any manufacturing process. This will help
the management of the organization to evaluate with the high rate of accuracy the unit cost of
manufacturing and other indicators of key performance. This information will be very useful for
the management to take decisions in relation to the production level and future investment. It is
necessary for the purpose of management accounting (Woodruff, Jim 2019).
Similarities and Differences:
ABC and traditional costing are the two distinct methods in the area of accounting for the
allocation of the indirect costs to products. Both the methods compute the overhead costs in
connection to the production and afterwards allocate the overhead costs to the goods based on
the relevant cost driver rate but the difference is due to the correctness and complexity involved
in the two methods. Traditional costing is simpler but less correct than ABC method and it
allocates costs to the products on the basis of the average rate (Lere, J. n.d.). On the other hand,
ABC is complicated and correct. In the case, costs are assigned to the activities and then it is
allocated to the products on the basis of the utilization of the activities by the respective
products.
Advantages and disadvantage of the Traditional Costing:
The implementation of traditional costing method is easier and simpler for the entity. It is also
cost effective as it is less expensive to implement. Most of the companies prefer this method as
it is easy to understand and they have belief in its reliability (Molis, Jim. 2019). Further it is also

COMPARISON OF METHODS OF COSTING 3
preferred because the outside users can easily assess the value of the products more easily as
compared to other methods. On the other hand this method does not provide correct results and it
is not much helpful to the management as it looks at the overhead in general.
Advantages and disadvantage of the ABC:
ABC is the most correct method but there is complexity in this method and it is expensive for
implementation by an entity. It is most suitable for the company having high overhead costs
which manufactures products (Langfield et. al 2012). In this method it is easy to determine the
areas where expenses are incurred on the non-profit generation products. This method provides
more precise details of the indirect costs. It helps in proper decision making and also helps in the
cost management. It also determines the correct type of the cost behavior and assist in reducing
costs (Datar S. M. & Rajan M.V.2017). On the other hand it is very expensive and complex in
nature and there are difficulties in implementation such as selection of the cost drivers and it has
disadvantages for small firms.
Conclusion:
Thus, it can be concluded that choosing among the ABC and traditional costing is not so easy.
The preference of the method is based on the purpose of the reporting. Since the management
requires correct cost of product and thus chooses to use ABC. Although this method is more
expensive, but it will help the management to take good decisions in the long run. Further for
external reporting the company still uses the traditional method, but it becomes obsolete as
outside users is demanding more correct information regarding the business.

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References:
Woodruff, Jim. (2019). Traditional Costing Vs. Activity-Based Costing. Small Business
Retrieved from http://smallbusiness.chron.com/traditional-costing-vs-activitybased-
costing-33724.html
Molis, Jim. (2019). Advantages & Disadvantages of Traditional Costing. Retrieved from
https://bizfluent.com/info-8645304-advantages-disadvantages-traditional-costing.html
Lere, J. (n.d.), "Activity‐based costing: a powerful tool for pricing", Journal of Business &
Industrial Marketing, Vol. 15 No. 1, pp. 23-
33. https://doi.org/10.1108/08858620010311539
Datar S. M. & Rajan M.V., (2017). Horngren's Cost Accounting: A Managerial Emphasis,
Global Edition (16th. ed.). Pearson.
Langfield-Smith, K., Thorne H., & Hilton R.W. (2012). Management accounting: Information
for creating and managing value (6th ed.). Sydney: The McGraw Hill Companies.