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Activity Based Costing vs.Traditional Approach (Sober Plc)
Finance & Accounting
Pages 4 (1004 words)
In order to adapt to the changing global market environments, firms and companies need to adjust through restructuring in many areas within the organizations, including, but not restricted to, change in accounting techniques.
Financial information forms the basis for much of the decision-making for organizations, and the need for more accurate information continues to grow. Ignorance of the manufacturing realities may put an organization at risk of losing its competitive edge, which inevitably results in loss of profitability and crippling losses. Traditional volume based costing techniques present numerous challenges to organizations, especially in the modern manufacturing environments, where the overhead costs continue to rise. In addition, introduction of new technological advancements in the production processes invalidates traditional cost allocation mechanisms and articulates the need for organizations to switch to new and more market aware costing systems. This paper discusses traditional versus activity based costing with regard to a case on a global motorcycle company currently in a managerial stalemate over the most appropriate costing method. Introduction Traditional costing techniques can be highly misleading in their estimation costs of particular products, markets, or organization activities. Traditional approach to allocation of overheads is blind to the factors that drive costs, which are known as cost centres in activity based costing (Luehfing, 2005). ...
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