Analysis of Traditional vs. ABC Costing Methods in Finance

The assignment explores the distinct approaches of traditional costing and activity-based costing (ABC) in financial management. It highlights how traditional costing allocates manufacturing overhead based on direct labor hours or production units as cost drivers, while ABC assigns costs to activities with relevant resources, reflecting actual product consumption. The analysis includes a comparison of allocated overheads for dance, run, and walk activities under both methods, revealing significant differences in total outcomes. Literature review references indicate that choosing the appropriate costing method depends on company characteristics and performance. Overall, this discussion emphasizes the importance of selecting suitable costing techniques to accurately analyze production costs and enhance decision-making.

AYB225 ASSIGNMENT PART C
Discussion:
From the schedule 6, it has been found that the traditional system is far different
from the ABC costing method. Traditional costing method takes the concern of various
unreverent aspects whereas ABC costing system undertakes all the required factors and
makes a decision accordingly.
According to the given analysis, it has been found that the traditional costing system
understates the entire expenses collectively whereas the activity based costing system
manages the entire cost of the comapny differently and then analyse the cost of the
company. According to the traditional costing method of the comapny, the total overhead of
the comapny is $ 28,125, $ 15,625 and $ 15,750 respectively for Dance, run and walk. At
the same time, it has been found that the total allocated cost according to the activity based
costing is $ 25,469.4, $ 13,408.8 and $ 20,622.23 respectively for the Dance, run and walk.
This depicts that various differences are there in the total outcome of the total
overhead of the comapny according to the traditional costing method and activity based
costing. Through these reports, it has been analysed that the following differences are there
among the activity based costing and traditional method.
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AYB225 ASSIGNMENT PART C
Literature review:
Activity based costing is a costing method to analyse the activities of an organization
and allocates the cost of entire activity with the relevant resources to entire services and the
products according to the definite consumption of the product. Consequently, the traditional
costing method allocates the manufacturing overhead according direct labour hour to the
cost drivers to the sales volume of the production house like the total amount of direct
labour hours are required to manufacture an item. Cost drives are an aspect which causes
the cost to incur like machine hours, direct material cost and direct labour hour.
Abdel-Kader & Luther (2008) has explained that the traditional costing and the activity based
costing method of the costing techniques assist the companies to analyse the product cost which is
related to the total income of the comapny. Mainly two methods are there to analyse the total cost of
the comapny, one is traditional costing method and other one is activity based costing. Traditional
costing allocates the manufacturing OH of a comapny according to the cost drivers like total labour
hour or total production units whereas the activity based costing method allocates the manufacturing
OH to the departments according to their occurrence.
McGaghie, Issenberg, Cohen, Barsuk & Wayne, (2011) expresses that the allocation of the
manufacturing cost is different from activity based costing and the traditional costing method. This
article depict that the comapny must choose the best cost allocation method according to the nature
of the company and the performance of the comapny. Thus through this report, it has been found that
a production house must analyse its activity and the production system of the comapny and must
choose the best technique methods accordingly.
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AYB225 ASSIGNMENT PART C
References
Abdel-Kader, M., & Luther, R. (2008). The impact of firm characteristics on management
accounting practices: A UK-based empirical analysis. The British Accounting Review, 40(1), 2-
27.
McGaghie, W. C., Issenberg, S. B., Cohen, M. E. R., Barsuk, J. H., & Wayne, D. B. (2011). Does
simulation-based medical education with deliberate practice yield better results than traditional
clinical education? A meta-analytic comparative review of the evidence. Academic medicine:
journal of the Association of American Medical Colleges, 86(6), 706.
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