Managment Accounting - Essay Example

However, under ABC, the product ABW generates a loss. In total, the ABC method results into a higher total profit for all the products as compared to the traditional costing method (389,000 > 388,750). Under ABC method, the per unit cost of product XYI = 39.25, YZT = 92.025, ABW = 73.583. On the other hand, under traditional costing method, the costs per unit of the same product are XYI = 40.175, YZT = 92.475 and ABW = 71.45. From the data, it is clear that the per unit cost of products XYI and YZT under ABC method is less compared to the costs under the traditional costing method.

The only exception to this fact is product ABW whose cost per unit under ABC method is higher than that under the traditional method. First, to establish a better platform for arguing the above statement, it is important to understand some basic knowledge in the costing process. Cost allocation is a concept that refers to the determination of the expenses incurred to offer a service. Costs can be allocated as direct, indirect and incremental costs. In the production process, manufacturers should be able to determine what costs fall under direct, indirect and incremental, in order to facilitate the ascertainment of cost of production.

Activity based Costing is a concept that refers to the ascertainment of various activities involved in the production of goods and services. Thereafter, the overhead costs are allocated to each activity and then assigned to the products and services (Pound 2010, pp. 45-90). Traditional costing on the other hand, allocates overhead costs using predetermined rate. That is, there is no allocation of costs on activities prior to the products and services. According to Vercio and Shoemaker (2007, par 1-18), the most accurate method of cost allocation is Activity-Based.

Unlike traditional costing method, Activity Based Costing recognizes the fact that, during a production process, not all costs are