Financial Report: Costing and Traditional Costing

Finance & Accounting
Pages 10 (2510 words)
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Name: Tutor: Course: Date: University: Introduction: This exercise dwells on activity based costing and traditional costing. Cost allocation in companies can provide inaccurate information about the profitability of their goods and services. Traditional cost allocation methods allocate overhead cost outlays with the aid of one driver like direct labour hours, direct labour dollars, or machine hours.


Numerous firms in all fields of businesses have opted to use Activity based cost allocation systems after realising that traditional costing methods in firms can give some misleading information regarding the product lines, profitability of products, markets and clients. Activity based costing is a process that measures the cost and performance of cost objects, activities and resources. Costs objects take in activities and activities take in resources. Factor (or resource) cost outlays are allocated to activities on the basis of their utlisation of those resources as well as activity cost outlays are assigned to cost outputs based on the cost objects relative to their utilisation of those activities. Activity based costing incorporates causal relationship between activities and costs as well as between resources and activities. (Stenzel, C and Stenzel J, 2001) Using Activity based costing tools has helped these organisations to appreciate profitability more clearly, and has provided meaningful information about processes and costs associated with manufacturing and delivering goods and services. Thus a well-made and implemented Activity based costing system is a great aid to management evaluation and decision-making, thereby improving organisational performance. ...
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