Question

Discuss the advantages/disadvantages of cost to charge, step-down, and activity-based costing methods

Answer 1

The Cost to charge and Step down are the traditional method a distribution of where the overhead cost are assigned to the production on the basis of plantwise cost driver like direct labor hours or cost and drawing prior “Overhead rate per cost driver”.

The advantages of the traditional based costing of overhead are : 1) According to the GAAP prescribed method. 2) Easy and simple as most appropriate cost driver is used. 3) The direct cost plus procedure of costing is used. 4) All the jobs are treated as par in allocation of overhead.

The dis-advantages of the traditional based costing of overhead are : 1) It is now a out dated methods as machines and computers used for production. 2) The cost driver used for determining overhead rate should not be apt for all the jobs. 3) It is a non-technical method based on estimate. 4) It being the plant-wide distribution method.

The Activity-based costing (ABC) of overhead distribution is an improvement over the traditional methods as under ABC method overhead rate is calculated and allocated at each are associated activity with the job.

The advantages of the ABC method are: 1) More sensitive distribution of overhead. 2) As each job differs in the different activity pattern so it is a appropriate method of allocation. 3) It is according to current requirements of production. 4) More technical based interpretation of cost. 5) Different cost drivers are utilized to have apt allocation.

The disadvantages of the ABC method are : 1) More numerical calculation is required 2) Much time consuming than the benefits 3) understanding the techniques could be difficult at execution level.