Question

What is the purpose of activity-based costing? How is it similar and how does it differ from job order costing and process costing? Can an organization use both job order costing and activity-based costing? Process costing and activity-based costing? Why or why not? What types of companies are more likely to use activity-based costing? Why?

Answer 1

a. Activity based costing: is a costing method that assigns overhead and indirect costs to related products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.

b. Differences with job order costing: Job order costing is used when products produced are unidentical. This way the firm is able to allocate only the cost involved in producing an order to the products produced. Mean while activity based costing is a systematic and more advanced way of allocating overhead cost. it first allocates the cost to cost centers and then to products that make use of the services of these cost centers.

c. Differences with process costing: Process costing involves the accumulation of costs for lengthy production runs involving products that are indistinguishable from each other. Process costing aggregates costs as compared to ABC where costs are segregated and allocated based on underlying activities.

d. Can an organisation use both costing systems: No, since the underlying basis of cost allocation and the target entities are different.

e. Uses of ABC costing:

1. Wide range of products and services

2. Customer diversity

3. Complex products

4. High overheads

f. Why ABC costing: It provides a more accurate cost per unit. As a result, pricing, sales strategy, performance management and decision making should be improved. It provides much better insight into what drives overhead costs.