Question

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

1.Process costing is method of allocating direct and indirect cost to the units produced. This method gave the concept of equivalent units. ABC is costing system where cost is allocated on the basis of organizational activity therefore it is called activity based costing.

2. ABC cost driver - Machine Hour, No of ATM withdrawal, No of transaction.

3. Process costing - If machine working cost is $ 250000 and equivalent units produced is 5000 then Machine cost per unit will be $ 50.

ABC - In the above example, Machine working hours are 7500 Hours then this is cost driver for above cost and machine cost per hour as per ABC will be $ 33.33 Per hour.

4. ABC is very well suited for complex manufacturing process. ABC gives more precise cost per driver then process costing. Process costing may provide over absorption or under absorption of overhead becasue it is not as robust as compared to ABC. Therefore ABC should be preffered in case which requires complex manufacturing.