Critical Analysis of Activity Based Costing and Traditional Costing System

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In the efforts to implement the Strategic Management Accounting approach in organizations,modern business enterprises find Activity-Based Costing as an improved costing system by which the problem of large number of indirect costs


It has been observed that ABC method is the most sought after innovation in the field of management accounting in the last two decades. The method was originated in the Unites States of America during the 1980s as an improved system to enable better cost allocation by means of classification of more costs as direct (Cooper and Kaplan, 1988). The advocates of ABC method argue that the firms would be able to enhance their efficiency and cost control without having affected the customers' value, if ABC is successfully implemented and followed. However, its acceptance rate is still overwhelming across industries and countries despite the strong recommendation by Robin Cooper and Robert S Kaplan, the proponents of the method. The main problem associated with the low implementation rate may be attributed to the difficulties and complexities of the system. This paper discusses and analyses the ABS system as an improved cost control technique. The paper takes comparative and analytical approach; in which comparison is made between ABC and Traditional Costing System (TCS). The paper discusses the various aspects of ABC as a superior technique of cost control by assuming hypothetical examples. Every attempt is made to analyse the important characteristic of ABC with that of TCS in a critical manner.ABC as the name signifies is a system of costing based on activities involved in transformation process. ...
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