Saturday, 23 June 2012

Activity-Based Costing Vs Traditional Absorption Costing (Critical Review)

By Jackie, Researcher
Topic: Education
Area of discussion: Cost & Management Accounting

The objectives of this research are to find out which method is considered the best method to allocate indirect costs (i.e to generate relevant cost information for decision making purposes), the correct ways on how to calculate it (steps by steps guide is given below plus an additional real question taken from LCCI as an extra revision purposes), to explain what are the differences between activity-based costing and traditional absorption costing system and how to use a “quick check” method of which I designed myself (to check whether the computed answers are correct or not?).

Introduction
Generally, both methods are used to calculate the cost of production. There are no differences between these two methods in finding material costs and labour costs. Their major concern is how to allocate the overhead costs to the cost of production. Ideally, using Activity-Based Costing is better than Traditional Absorption Costing as it is more accurate, reasonable and appropriate. This is because Activity Based Costing system uses both volume-based and non-volume-based cost drivers, while Traditional Absorption Costing system uses only volume-based cost drivers. Examples of volume-based cost drivers include: units of output, direct labour hours and machine hours while examples of non-volume-based cost drivers include:  numbers of production inspection, number of machine set-up, number of stock requisition and etc.

Let’s take a look at this example:




Based on the question above, single-stage traditional absorption costing system applies, whereby we need to total up all the overheads cost and then divide it by the total level of activity.  For this question the level of activity will be the total number of machine hours. After dividing it, we will get the overheads cost per one unit of activity (i.e. production overhead absorption rate). Then, the final step is to allocate this rate to the products by multiplying it with the number of machine hours used by a particular product. See below.




For Activity-Based Costing, since the separate cost activities are already given, then we only need to divide the cost of each activity with their respective cost drivers in order to find the activity rates. Cost driver is the factor that causes a change in an activity cost. For example: number of inspections and number of set ups. See below.




Then, the final step is to allocate those rates to products by multiplying them with the amount of cost drivers which will be used by them. For example, if product Alpha requires 20 inspections, then, 20 inspections x £800/inspection = £ 16,000 will be allocated to product Alpha. In order to find the product inspection overhead per unit, we have to further divide the amount by the Alpha’s total production output (units) which is 500 units. Then, £32 will be allocated to each unit of Alpha. Same method of calculation applies for the rest. See below.




A “quick check” method:
Although the cost of production per unit for each product is different in Traditional Absorption Costing and Activity-Based Costing, both methods will have the same total cost of production and because of this we can use this “quick check” method to check the answers.




References, additional readings and related links:

Gain an understanding of the basic concept of activity based costing

The basic concept of activity based costing

Activity Based Costing versus Traditional Costing

Activity Based Costing with worked example to compare with Traditional Costing

50 comments:

  1. nice share
    visit - http://trygadget.com/travel

    ReplyDelete
  2. This is the best explanation of ABC and Traditional Costing out there!
    Thank you!

    ReplyDelete
  3. Thanks a bunch for sharing this post. I’m glad to find your post. Keep sharing!! Have a super fabulous day!!!
    Professional online Assignment writing help Available in Australia

    ReplyDelete
  4. Reliable writing service as this one https://writer-elite.com/ can safe every student from sleepless nights and difficult writing assignment. Why not choose this way and have an easy and comfortable studentship.

    ReplyDelete
  5. Thanks for the post. Are you worried about your university assignment? We are here to reduce your stress. Find quality assignment help at reasonable price only at Student Assignment Help.

    ReplyDelete
  6. Hello! I decided to add several words about writing papers. I know that it is not easy to write something really good. That is why, I recommend you to apply to the essay writing service. there you can find a ot of useful information like serial numbering systems description essay

    ReplyDelete
  7. Hi guys, you havent already know how to write a good essay and other terms paper? from now it is now a problem with the help of paper land you will have an exlusive paper for a short period of time

    ReplyDelete
  8. This is something very important to understand, I really appreciate your efforts to share such information. Here I am also sharing some information that might be useful for students looking for Assignment Help , in various subjects like, MATLAB Assignment Help , or Matlab Assignment Help Online.

    ReplyDelete
  9. We know all the issues that you face while writing an academic paper. We understand them and then find the perfect solution in the form of academic writing help services. This helps us to provide you the top-quality assignment writing service so you can write a perfect paper and submit that well within the deadline. Now writing assignments and scoring better marks is as easy as getting chocolate from a general store.

    ReplyDelete
  10. This comment has been removed by the author.

    ReplyDelete

  11. Get assignment help. Most students could do with the Australia assignment help There is a reason. Your thoughts may be in order but when it comes to translating them to words on paper that have a flow and consistency as well as perfect grammar, this is beyond most students. Expert writers can do it effortlessly but for students it is not an easy task. In such cases you can seek assistance from a quality Assignment Help USA with a proven track record of delivering well-researched, well-written, plagiarism-free assignments.

    ReplyDelete
  12. Again, this is a very impressive topic. Thank you all the time. I've been reading your articles with interest from before. If possible, please visit my website and read my post and leave a comment. Have a good day!토토사이트

    ReplyDelete
  13. You can track down a multitudinous website on the World Wide Web these days. Nonetheless, it is difficult to waitlist the bona fide and solid website that can give you Last Minute Assignment Help. You should be picky in recruiting Best Assignment Writing helpers, all things considered, it's a matter of your future and it can likewise make a major opening in your pocket while rehashing the subject. assignment provider
    assignment help melbourne

    ReplyDelete
  14. 나는 찾고 있고 "당신의 게시물의 내용이 멋지다"라는 댓글을 달기를 좋아한다. 수고했다!토토사이트

    ReplyDelete
  15. Hire our experts to get help with thesis writing australia. We can help you with custom writing service ensuring your success in the class.

    ReplyDelete
  16. Thank you for sharing such an amazing write-up with us!
    How To Buy Domain By Godaddy 

    ReplyDelete
  17. largest companies by market cap. Was muddling along with its 50-day and 200-day moving averages and Twilio gave bulls a strong bounce on Thursday also Shares ripped right to the 21-week moving average. cisco market cap

    ReplyDelete
  18. best fantasy app .Cricket Fantasy League with Best play Fantasy Cricket App Play Cricket earn Money. Download App to know more Play and win Exclusive Prizes & Experiences only with Fantasy Power 11.Instant Paytm Withdrawal Fantasy Power 11.

    ReplyDelete
  19. Awesome blog!! Thank for providing excellent information. Actually quite helpful data accessible here. If you are looking for javascript assignment help online then you can visit our site.... Hire native seasoned experts at very affordable prices. We are the most reliable assignment helpers. We have gained our specialization project management assignment help australia after spending most of our time making ourselves perfect. We provide 100% plagiarism-free Assignment Writing Services. Our management assignment help australia helps developers are experts in every subject because of which they provide reliable services all over the world.

    ReplyDelete
  20. I am a frequent traveler, my personal travel experience says that not all conditions are good to travel by air sometimes conditions caused by nature, and in some cases, by our issues, it brings retraction of the booked Air ticket. I generally really like to go with Alaska Airlines since it's straightforward the Alaska airlines cancellation policy policy offer substantially more adaptability. I'm very thankful to the team of Airlinespolicy.com, who guide me about Alaska Airlines and its all policy in detail.

    ReplyDelete
  21. Philippine airline is the oldest airline. Sometimes passengers want to cancel their flight booking because of any problem then Philippine Airline Change Flight Policy offers you to change your booking by the easiest mode i.e online whether it doesn't matter that you have booked through online or by the airport. It provides hassle-free procedure to make any type of instant changes.

    ReplyDelete
  22. Sometimes passengers stuck in a situation where they are helpless and the don't have any option without cancelling or making changes to their travel plans. For this Hawaiian Airlines Flight Change Policy gives you some relief. You are totally able to make changes in bookings.

    ReplyDelete
  23. Matlab Final Year Project Help

    Management accounting assignment helpis the process where a student hires thetutorshelp.com to complete their Final Year Entrepreneurship Assignment help
    Project (FYP) or Engineering Assignment. The Staff at thetutorshelp.com is highly skilled in their domain; So this is the main reason for our success, The Tutors Help have a successful idea and a successful team which make us a successful Matlab Final Year Project Provider Service is this a final year project for a chemical engineering university assignment; Our services are a must for every engineering student.

    Another thing is that we have some of the most educated and most experienced professionals in the Tutors Help in the Matlab Final Year Project Support Service, working for The Tutors Help Assignment Service, who provide or offer assignments to college students working on Matlab Assignment Help we do.

    All the experts in our The Tutors Help Service are accredited personalities. All the Members of the team have Knowledgeable or gained a lot of recognition in their working and educational life. All professionals have a great and commanding skill to understand the requirements of the students.

    MATLAB assignment help

    ReplyDelete
  24. I must say that Air New Zealand offers so much flexibility to cancel your flight without paying a cancellation fee. Recently, I had to make a travel cancellation and eventually, had to cancel the travel air tickets. Air New Zealand 24 hour cancellation policy is easy to understand, and helped me to make a cancellation without any cancellation fee to my booked flight ticket.

    ReplyDelete
  25. You want to visit a Yoga Retreat in Rishikesh? Here are famous gateways to reduce stress and calm your tension nerves of your body at the beautiful and natural location at the Himalaya. You can enjoy Ayurvedic message, meditation and yoga sessions in the premises of the resort. They also provide nutritious food and recreation activities that will enhance your overall mental and general health. We are the one of the best Resort in Rishikesh providing the best administration, facilities, Spa treatment, Yoga sessions, and many more. Book resort rooms directly from our Official Website.

    Visit here to know more details and reviews.

    1. Shaantanamresort administration reviews
    2. Shaantanamresort facilities reviews
    3. Shaantanamresort Spa treatment reviews
    4. Shaantanamresort Location reviews
    5. Shaantanamresort law and regulations reviews

    ReplyDelete
  26. This blog has given me all the information I have been looking for, and I want to say thank you. I wish you more knowledge to do more of this. futa cut off mark for computer science

    ReplyDelete
  27. No need to say a single phrase about the post content because the blog is very nice to read and I understand the main meaning of this blog that I want to explore here. You can also know about the Cheap Flight Booking by reading Some Travel Blog:
    Delta Airlines Booking
    Delta Airlines Book A Flight
    Alaska Airlines Booking
    Alaska Airlines Book A Flight
    Priceline Cheap Flights

    ReplyDelete
  28. Are you a flexible passenger who might need to cancel your booking at any point of time? Book your tickets with Lufthansa Airlines because it believes in providing the utmost flexibility to its flyers. Review the lufthansa cancellation policy, and cancel your current reservation without any additional effort. Moreover, you have different ways to confirm your flight cancelation. Pick the desired way, and get it done.

    iberia cancellation policy
    air france cancellation policy
    klm cancellation policy

    ReplyDelete
  29. Thank you very much for this interesting and great information, i found it very helpful, please keep updating us with helpful information, you are doing well. federal university lafia post utme form out

    ReplyDelete
  30. First and Foremost an individual will be required to be on the official website delta.com On this page, you will be required to choose Round trip, One Way or Multi- city, destination of travel refundable fares or Cheap Delta Flights of travel once the details have been selected click on Advance Search In order to make a trip more comfortable you will be provided with Book Delta Flights & For More Informations Visit www.delta.com.

    ReplyDelete
  31. Your article is very helpful and informative. I really appreciate it. If you are the best to deal on flight tickets then contact us. Visit our spirit airlines official site

    ReplyDelete
  32. Find the Best Ohio Online Gambling Sites in the USA. We provide the Online Poker game and provide information on states allowing online about poker game.

    ReplyDelete
  33. Visit the best website to play online Poker game in Ohio. This website has best features, awards and winning prizes. Visit for more information.

    Online Poker game in Ohio
    Play Online Poker in Ohio

    ReplyDelete
  34. Thanks for sharing this interesting information. I appreciate it very much. Please let us know if you have any new information. Thank you. I would appreciate any feedback you may have on my article. The following article explains how the kohi click test tool was developed for The Best Minecraft Server Hosting of 2022. Furthermore, I am able to develop complex games as well. See Check CPS Test Kohi for more information.

    ReplyDelete
  35. you always shocked us with your amazing post. I have never been on site like yours. I was looking for Different Types of Sewing Machines then I came to know about your site and this is outstanding.

    ReplyDelete
  36. Very fantastic and educative blog, everything is very open with a precise description of the challenges, your site is very useful and I found enormous joy reading through. Thanks for sharing! eacoed cut off mark for theatre arts

    ReplyDelete
  37. Its a fantastic updates which I believe everyone will be glad to read from this blog post so as to oblige from. Many thanks so much for sharing. Also visit How to immigrate to Canada

    ReplyDelete
  38. Nice Content shared by you. Thank you for helping me reduce stress of searching over and over again. gst222 past question and answer

    ReplyDelete
  39. This comment has been removed by the author.

    ReplyDelete
  40. Very informative blog, thanks for sharing! Delta airlines allow minor corrections on confirmed booking for a fee, under the Delta airlines name change policy. For more information, contact us at +1-888-982-1907 or visit the website today!

    ReplyDelete
  41. Thanks for sharing this interesting information. I appreciate it very much. Please let us know if you have any new information. Thank you. Website Designing Company in Faridabad

    ReplyDelete

  42. Many thanks for the efforts you have put into writing this site.
    United Airline Refund Policy

    ReplyDelete
  43. ¿Necesitas hacer un cambio de nombre en tu vuelo con Iberia? En Tiquetes De Vuelos te ofrecemos asistencia experta para resolver este trámite rápidamente y sin complicaciones. Nuestro equipo te guiará a través de todo el proceso para que tu nombre se actualice sin errores. Evita contratiempos y disfruta de una experiencia de viaje sin estrés. Contáctanos hoy mismo y obtén la solución perfecta para tu cambio de nombre con Iberia. ¡Hazlo ahora con cambio de nombre iberia y viaja con tranquilidad! Visítanos en TiquetesDeVuelos.com para más detalles.

    ReplyDelete
  44. ¿Necesitas ayuda con iberia cambiar nombre pasajero ? Llama al 858 634 9485 para gestionar tus modificaciones de manera rápida y eficiente. ¡Recibe asistencia personalizada en todo momento!

    ReplyDelete