Question

Companies can choose from different costing methods: process/product costing and activity-based costing.

The company I chose is CVS. Using the CVS company answer the following questions:

• 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

The difference between the two methods are:-

Process based costing refers to ,

In some industries products asses on to different processes, and each process is structured nd well defined. The output of each process is used as a raw material of the next process and may also be a marketable commodity. In this type of costing it become necessary to ascertain cost at each stage. This helps in comparing cost with the market price and cost control.

Activity based costing under this costing cost of each method or activity is determined separately.

B. Following are some cost drivers that a company CVS might use:-

1. Plant setups

2. Machine set up

3. Maintenance

4. Consumed power

5. Quality inspection.

C. The cost could be different if two methods are choosen:-

Product costing is relatively simpler form of allocating direct or indirect cost whereas the activity based costing assign cist to cost centers rather than exactly to the goods produced.

D. According to me the process costing is a best method as the management could vet to know about the cost of every specific process undertaken for the manufacturing of a product and it can compare the cost of each process with the market price of that process.