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3-1 Discussion: Presenting Costing Information

 

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Companies can choose from different costing methods: process/product costing and activity-based costing. Think about a company you know and answer the following:

What are the differences between the two costing methods, and how do these apply to your company?What are some ABC cost drivers the company might use?How could the costs differ if one method is chosen over the other?Which method would you recommend for your company, and why?

Answer 1

ABC COSTING :

The activity-based costing (ABC) system is a method of accounting you can use to find the total cost of activities necessary to make a product .The ABC system assigns costs to each activity that goes into production, such as workers testing a product.Activity-based costing approaches costs from the perspective that products do not cause costs; they require activities, and the activities themselves are the causes of all costs incurred. This method is better suited to the increasingly complex flow of today's manufacturing processes.

PROCESS /PRODUCT COSTING :

Process /product costing are is traditional method practice . In this method they accumaltes all the direct costs items and allocates all indirect costs in their manfacturing process. This method seeks to allocate all costs down to individual units of finished product. The rationale behind product-based costing is that each unit produced caused a certain percentage of both the fixed and variable expenses the company incurred. Direct costs such as raw materials are allocated per unit and overhead costs are allocated either equally across all units produced or on a weighted basis derived from a variable such as direct labor hours.

ABC cost drivers:

cost drivers depends upon that their process of production like in case of soap manfacturing company their may be like testing of soap etc and quality testing of it in same way it depends like labour hours , overhead expenses etc.

How could the costs differ if one method is chosen over the other:

if we choose ABC costing it shows accurate because it based on activity which allocated to product . product costing based weighted average per unit . so it large size business we are using ABC COSTING .