Management acccounting - Assignment Example

The intention of any costing system is not to replace an accounting system; but instead, to work within the broad frameworks of the accounting systems by extracting specific data for ease and speed in analysis (Barnett 2007). Costing systems exists in many forms two of which are the Conventional Absorption Costing and the Activity Based Costing (ABC). The conventional Absorption costing is a costing technique where all the costs associated with the production of the good or the services are considered; it is also called full costing (MeÌvellec 2009).

It is used with the intent of giving the full picture of a company’s financial situation. Activity Based Costing on the other hand involves cost allocation based on cost drivers and they are known to provide companies with the most accurate costs for the products they produce despite the fact that they are time consuming to prepare. For ABC costing, direct materials, direct labor and manufacturing overhead will each have a cost driver; this will aid the application of the costs to the goods and services (Gosselin 2005).

A comparison of the Conventional Absorption costing which is the traditional method applied and the Activity Based Costing, which is the modern approach, indicates that in most of the products, the ABC profits are higher than the Traditional cost profits. While the Traditional Method gives a total profit of 386,000, the ABC profits are 389,010; ABC’s profits are higher by 3,010. This difference may first be attributed to the approach and assumptions that are applied by either method to arrive at the profits.

The traditional systems are known to apply the single volume-based cost driver approach, which has the tendency of distorting the costs of the products (MeÌvellec 2009). It does this by assigning the overhead costs to the respective products based on how they utilize direct labor making the systems report inaccurate product costs (Barnett