Question

(3) CHOOSE ONE OF THE TWO BELOW AND ANSWER THOROUGHLY.

1. What are the principal differences between Activity-Based Costing (ABC) and traditional product costing?
2. What is Cost Behavior Analysis (CBA) and why is it important to management?

(4) CHOOSE ONE OF THE TWO BELOW AND ANSWER THOROUGHLY.

1. Managers often think that they should eliminate any divisions that is unprofitable in order to increase the overall profitability of the company. However, sometimes eliminating an unprofitable division actually reduces a company’s profitability. Explain why.
2. What are the benefits of Budgeting? What are the essentials of an effective budget?

basically answer choose 1 question from each section [3, 4] and answer,thank you

Answer 1

ABC Costing is a method of absorbing the indirect cost into product cost using activity cost driver. In traditional costing the indirect cost is absorbed into product using cost driver which is either labor hours or machine hours. Both methods are concerned with allocation of overhead cost to products but the way it is done makes the difference. In traditional costing pre-determined rate is calculating using machine hours or labor hours at beginning of the year and then allocation is done to product based on actual machine hours or labor hours. This method is simple and less time consuming. But is does not give accurate reflection of the cost. Hence to overcome this drawback Activity Based Costing can be applied which gives accurate product costing but it is time consuming and can be complicated at times. From decision making point of view ABC Costing makes more sense as management wants to make realistic decisions.

	Traditional Costing	ABC Costing
Technique	Traditional way of overhead allocation	Improved technique of overhead allocation
Basis of allocation	Machine hour or labor hour	Activity Cost driver
Cost allocation	Cost is aggregated and then machine or labor hour rate is pre-determined	Cost are aggregated into cost pool and then activity cost driver rate is pre-determined
Usefulness	Useful if overhead is directly related to machine or labor	Useful for product costing where activities can be identified for each cost

Companies use budgeting techniques due to following benefits

• Helps in achieving efficiency and economy in various activities and operations of the company
• It helps in bringing divisional and departmental accountability and responsibility
• It helps in business planning and achieving strategic objectives
• It helps in Cost control and Cost reduction
• It helps in performance evaluation of employees and is a source of motivation to achieve targets
• It helps management in understanding most profitable combination of different factors of production
• It helps management in taking timely and reliable decisions
• It helps in smooth conduct of business operations by taking into account all conditions

Essential of an effective Budget

· Budgets should be linked to strategic and long term objectives of the organization

· It needs support and co-operation of top management to implement budget

· Authority and responsibility should be well defined with a proper setup for budget implementation

· Budget policies should be defined which are clear and understandable

· Managers and employees should be motivated to implement the budget

· There should be regular feedback taken on budget implementation and its impact

· Budgets should be regularly monitored and corrective actions should be taken for any deviations