Question

.Differentiate between functional based costing and activity based costing. Comment on cost distortions commonly observed in traditional costing systems

Answer 1

Both activity based costing and functional based costing is done to allocate the expenses incurred in manufacture of goods. The difference is that activity based costing is a modern method of costing which is gaining popularity day by day where as in case of functional based costing, it is a traditional method of costing being used since ages.

Another difference between functional based costing and activity based costing is that the they allocate costs to different units.

Activity based costing focuses on various activities of the organization like purchasing, machining, warehouse and receiving whereas the functional based costing focuses on various functions of the organization such as sales, purchases, advertising, administration and marketing.

Distorations occur regularly in traditional costing system where variations exist in volume. Traditional systems generally overcost the high volume systems and vice versa. There is a lot of difference between traditional and activity based costing system since traditional costing system may show the organization is profitable while activity based costing may reveal that the organization is in fact in losses. The allocation of expenses differ in both the systems.