Difference Between Traditional Costing Systems And Essay

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In the past, it was easier and less expensive to determine the cost of product(s) by using Traditional Costing systems. However, technology has expanded and improved rapidly, in recent decades. Product diversity has increased in many industries, which has caused indirect cost to become a larger percentage of product cost(s). One of the best ways to improve a cost system is by the use of Activity-Based Costing (ABC).

              The well-known difference between Traditional Costing systems and the ABC system is how each focuses on activities. Traditional Costing systems measure the direct cost of products, such as direct material and direct labor. Only these can be traced directly to the product. Activity-Based Costing systems focus on indirect cost, such as manufacturing overhead. The more activities which can be classified, the more accurately the product cost will be expensed. Historically, after the products have been produced, the company decides the value of production. In contrast to the Traditional Cost Accounting system, Activity-Based Costing allows the company to use customer feedback and relevant range to determine the value of product.

              Many companies with huge overheads have a diversity of activities. They are benefited most by the use of Activity-Based Costing. For example, Dell Computer produces personal computers, as well as other types. To manufacture personal computers requires different activities in different product lines. By utilizing the Activity-Based Costing system, cost information has become more accurate. It aids managers to make better decisions about pricing. Another example from using ABC is ABB Industrie AG, an international company, which develops, manufactures and assembles electrical equipment in Switzerland.   It had been very difficult for the firm to adequately assess the cost of individual processes and calculate the cost objects. Using Activity-Based Costing, the company has not only better been able to...

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