Calculating an exact manufacturing cost for each product is a critical piece of details for a company’s decision-making. For example, learning the cost to create a unit the product affects no only exactly how a business budgets to manufacture the product, however it is often the beginning point in determining the sales price.
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An vital component in determining the complete production costs of a product or project is the suitable allocation that overhead. For some companies, the regularly less-complicated traditional method does wonderful job of allocation overhead. However, for plenty of products, the allocation the overhead is a more complicated issue, and an activity-based costing (ABC) system is much more appropriate.
Another variable to take into consideration in determining which that the two major overhead allocation techniques to use is the cost associated with collecting and examining information. Once making your decision about which technique to use, the company must consider these costs, both in time and money. (Figure) to compare overhead in the two systems. In numerous cases, the ABC method is much more expensive in terms of time and other costs.
The difference in between the traditional method (using one expense driver) and the ABC an approach (using multiple cost drivers) is more complex than simply the variety of cost drivers. When direct labor is a huge portion the the product cost, the overhead prices tend to it is in consistently thrust by one expense driver, i beg your pardon is frequently direct job or machine hours; the traditional technique appropriately allocates those costs. When technology is a huge portion the the product cost, the overhead costs tend come be driven by lot of drivers, so making use of multiple price drivers in the ABC an approach allows because that a more precise allocation the overhead.
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|Overhead assigned||Single price driver||Multiple expense drivers|
|Optimal usage||When direct labor is a large portion of the product cost||When technology is a huge portion of the product cost|
|Orientation||Cost driven||Process driven|
As shown with Musicality’s products, not only are over there different costs for every product as soon as comparing classic allocation with an activity-based costing, yet ABC proved that the Solo product create a loss because that the company. Activity-based costing is a more accurate method, due to the fact that it assigns overhead based upon the activities that journey the overhead costs. It can be concluded, then, that the cost and subsequent gross loss for each unit’s sales provide a more accurate photo than the in its entirety cost and gross profit under the timeless method. (Figure) to compare the expense per unit using the different cost systems and shows how different the costs can be depending upon the method used.
(Figure)Carlton’s Kitchens renders two species of pasta makers: Strands and Shapes. The agency expects to manufacture 70,000 systems of Strands, which has a per-unit straight material price of $10 and a per-unit direct labor price of $60. It also expects to manufacture 30,000 devices of Shapes, which has actually a per-unit material price of $15 and a per-unit direct labor cost of $40. That is approximated that Strands will use 140,000 maker hours and also Shapes will need 60,000 device hours. Historically, the firm has used the classic allocation an approach and applied overhead at a rate of $21 per device hour. It was determined that there to be three expense pools, and the overhead for each cost pool is shown:
(Figure)Carlton’s Kitchen’s three price pools and also overhead approximates are together follows:
The approximated overhead because that the material cost pool is approximated as $12,500, and the estimate for the maker setup swimming pool is $35,000. Calculate the allocation price per unit the brass and also per unit of gold using:The traditional allocation methodThe activity-based costing method
(Figure)Portable Seats provides two chairs: folding and wooden. This information was derived to testimonial the decision to think about ABC:
(Figure)Casey’s Kitchens renders two varieties of food smokers: Gas and also Electric. The agency expects to manufacture 20,000 devices of Gas smokers, which have a per-unit direct material cost of $15 and a per-unit direct labor price of $25. It additionally expects to manufacture 50,000 units of electrical smokers, which have actually a per-unit material expense of $20 and a per-unit straight labor expense of $45. Historically, it has used the traditional allocation an approach and applied overhead in ~ a price of $125 per device hour. That was identified that there were three price pools, and the overhead for each expense pool is as follows:
(Figure)Casey’s Kitchens’ three expense pools and overhead estimates are together follows:
The estimated overhead for the material cost pool is approximated as $45,000, and also the estimate for the machine setup swimming pool is $55,000. Calculation the allocation price per unit the silver and per unit of yellow using:The classic allocation methodThe activity-based costing method
(Figure)Portable Seats renders two chairs: folding and also wooden. This details was derived to review the decision to consider ABC:
Compute the overhead assigned to every product under:The traditional allocation methodThe activity-based costing method
(Figure)Cape cod Adventures provides foam noodles with sales the 3,000,000 units per year and also retractable watercraft oars through sales that 50,000 pairs per year. What info would Cape cod Adventures require in bespeak to adjust from timeless to abc costing? What are the restrictions to activity-based costing?