Question

Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?

Answer 1

Solution:

Activity-based costing and traditional costing are two different methods for allocating overhead costs to products.

Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods. Traditional costing is more simplistic and less accurate than ABC, and typically assigns overhead costs to products based on an plant wide singel overhead rate.

ABC is more complex and more accurate than traditional costing. This method first assigns overhead cost to activities then allocates costs to product on the basis of product's use of activities. Therefore in this method overhead cost related to each activity are allocated to products on the basis of efforts undertaken in each activity by product, Thus this method provide accurte result of product costs than conventional cost systems.