Companies can choose from different costing methods: process/product costing and

Question

Companies can choose from different costing methods: process/product costing and activity-based costing. Think about a company you know and answer the following:
What are the differences between the two costing methods, and how do these apply to your company? What are some ABC cost drivers the company might use? How could the costs differ if one method is chosen over the other? Which method would you recommend for your company, and why? Companies can choose from different costing methods: process/product costing and activity-based costing. Think about a company you know and answer the following:
What are the differences between the two costing methods, and how do these apply to your company? What are some ABC cost drivers the company might use? How could the costs differ if one method is chosen over the other? Which method would you recommend for your company, and why? Companies can choose from different costing methods: process/product costing and activity-based costing. Think about a company you know and answer the following:
What are the differences between the two costing methods, and how do these apply to your company? What are some ABC cost drivers the company might use? How could the costs differ if one method is chosen over the other? Which method would you recommend for your company, and why?

Explanation / Answer

Activity Based Costing and product costing are two methods to allocate indirect overhead cost to product.

Under Product Costing simply assign overhead on a single basis (generally higher actiiy level eg:machne hours) and are allocate overhead weighted to individual units of finished product.

for eg: Total Overhead /Machine hours

But at the same time Under ABC Costing overhead is assigned on Basis of all Cost Pools, cost pools are the activities undertaken in production eg: labour , machine. Which then Measure Cost Pool using each Cost Driver , Cost driver is the activity measurement basis eg: labour hours , Mahine Hours.

Like above each factors are considered under ABC costing to get appropriate Allocation of Overhead.

Traditional Costing system are not accurate so will give higher value of Overhead allocated for higher amount of basis selected.

Which method would you recommend for your company, and why?

It totally depends upon the size and level of activity of busness even ABC gives better resukt it is complex for calculation while Product costing is easy method for allocating overhead.

So decision will be relative upon business.

ABC Cost POOL Cost Driver Machine Setup No: of setups Product packing No of products packed Maintanance No of batches

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