Activity-Based Costing This Is a Essay

But the customized product probably takes much more design and engineering time than the mass-produced product. Traditional costing systems would not, in most cases, pick up this difference.

With traditional costing a company that makes both low and high volume products might spread all of its overhead to products it manufactures based solely on machine hours. This might misallocate overheads between products. And if one product demands a significant amount of engineering, testing and setup, but the other does not, the result will be some level of miscalculation of overheads. ABC/TDABC overcomes this problem by assigning overhead on more than the one activity of machine hours. Activity-based costing recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs -- they cause the company to consume resources (Accountingcoach.com, n.d., para. 2-3).

ABC became popular in the early 1980s because there was dissatisfaction with traditional accounting methods. But at least part of the reason ABC fell out of favor was that companies had, for many decades, used traditional costing mechanisms, and they were integrated into their businesses.ABC was not easy to incorporate into a traditional company, but many soon found that its advantages outweighed the inconvenience of switching (Economist.com, 2009, para. 8)).

It seems clear that traditional accounting methods are becoming antiques in a modern world. Due to the rapid pace and globalization of businesses, the costing model must be flexible and easily adaptable. It appears this is the big advantage ABC, or its big brother TDABC, have over the traditional model -- not to mention increased profitability due to more accurate costing.

Bibliography

Accountingcoach.com. (n.d.). Activity-based costing. Retrieved July 9, 2009, from accountingcoach.com: http://www.accountingcoach.com/online-accounting-course/35Xpg01.html

Economist.com. (2009, June 29). Activity-based costing. Retrieved July 9, 2009, from Economist.com: http://www.economist.com/businessfinance/management/displaystory.cfm?story_id=13933812

Kaplan, R., & Anderson, S. (2005, January 24). Re-thinking activity-based costing. Retrieved July 9, 2009, from Harvard Business School: http://hbswk.hbs.edu/item/4587.html

Research Corner. (2009, April 28). Advantages and disadvantages of activity-based costing with reference to economic value addition. Retrieved July 9, 2009, from Scribd.com: http://www.scribd.com/doc/14751986/Advantages-and-disadvantages-of-activity-based-costing-with-reference-to-economic-value-addition.....