Question

- In your own words briefly describe how Activity Based Costing differs from traditional costing?

- Please discuss at least three ideas that Measure Cost Right- Make the Right Decision provided to the field of managerial accounting?

Answer 1

ABC vs Traditional costing

	ABC	Traditional
Definition	Activity-based costing determines activities associated with production and assigns cost based on different cost drivers and allocates it to products.	Traditional Costings assigns the cost to products on basis of averaefe overhead by using one cost driver such as machine/labour hours and distributes the costs to the products.
Cost Pools	More than one cost pools in order to represent different activities undertaken while production is process	One or limited number of cost pols
Cost assignment	Assigns costs to first activities and then to products/services	allocates cost first to departments and then to products
Ease of Use	Complicated to use and apply and costlier to apply	Very easy to use and inexpensive
Suitability	Capital intensive industry with varied activities and diverse product lines	Labour intensive, where Labour hours are the only basis of cost allocation of overhead
Cost -Driver	Volume based cost driver	Activity based cost drivers

How to chose the right cost driver i.e. measure the cost right through Activity based costing

• Identify the cost object- In order to measure cost, a cost object has to be identified i.e various types of overheads a company has. For example in a service firm a cost object can be cleaning of floors. Right cost objects leads is the first step to identify correct cost driver and thus the cost
• Investigate different Cost drivers - In order to determine the most suitable cost driver, different cost drivers should be investigated and a cause effect relationship should be determined. An appropriate cost driver would have a significant imact on the cost object.
• Determine cost driver correlation- After identifying potential cost drivers and investigating thier cause effect relationship the choice is to be made on the basis of which cost driver has a better correlation with the cost object and should be the selected cost driver.