Difference between Traditional Costing and Activity-Based-Costing

Published: 2021-07-06 06:25:54
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Category: Business and Finance

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Article 1Every organization accounts for critical elements to ensure profitability as well as growth. In any instance, it is necessary to understand the system that works best in meeting the needs of the organization. The utilization of either traditional or Activity-Based Costing creates a clear correlation between the expenses and revenues within the organization. The use of traditional costing makes use of the indirect costs of various products within the organization. The justification relies on the predetermined overhead rate. Traditional costing is different from the ABC approach since it regards the overhead costs as one instance of indirect costs. For optimization of this approach, the indirect cost must be low about the direct costs. Pawłyszyn (2017) further posits that ABC costing approach is accurate compared to the traditional method. That mostly arise due to the ability to provide a precise breakdown of all costs involved and mostly the indirect costs. The only challenge that arises due to the use of ABC is the complexity involved as well as the implementation cost. The transition from traditional to ABC costing is also an uphill task and organizations should have the right mechanisms into consideration to ensure success. Even though traditional costing is more straightforward compared to ABC, an organization should work with what gives the best returns.ReferencesPawłyszyn, I. (2017). Time-driven activity based costing as a basis for undertaking lean activities. LogForum, 13(2). https://search.proquest.com/openview/32ef7e860c4b43f0dcd23079459f2281/1?pq-origsite=gscholar&cbl=2046043Article 2The implementation of costing within an organization is critical in determining the production costs and bring a correlation between the revenues generated. Through costing, it is possible to determine the overhead regarding production and further allocate the costs to the business processes. Two fundamental methods exist which helps in allocating the indirect costs. The methods are crucial since they assess overhead costs and create an attachment to the products. That relies on certain costs involved. The first approach is the ABC costing and accounts for costs related to production (Allain & Laurin, 2018). It further assigns costs to the various activities, and that helps in determining the actual costs of the product. Again, there is the traditional costing approach, which mostly assigns cost based on the average overhead rate. The ability to pool all the indirect costs related to the production and apply them equally across the processes makes the process simpler. ABC accounting process considers some factor before making the final decision, and that improves its accuracy in the accounting field. The use of Traditional accounting process should apply in instances with limited time. On the contrary, the use of ABC applies when there is the need for accuracy. It depends on the needs of the organization at any given instance.ReferencesAllain, E., & Laurin, C. (2018). Explaining implementation difficulties associated with activity-based costing through system uses. Journal of Applied Accounting Research, (just-accepted), 00-00. http://www.emeraldinsight.com/doi/abs/10.1108/JAAR-11-2014-0120

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