Jet Task 2 Essay

1615 Words7 Pages
Costing provides a company with additional information to help when making financial decisions. Within accounting there are two main types of costing systems, Traditional Costing (TC) and Activity Based Costing (ABC). Both methods allocate the indirect (overhead) costs to the products produced. There are two outcomes to costing, accurate or skewed data. Most management would prefer to use the method that benefits their company verses a method that could create more waste and in the end more work correcting the financials. ABC and TC vary slightly from each other. Accuracy – TC is less accurate then ABC, unless the company is only producing one product. Complexity – Along with the most accurate costing, management would also appreciate simple. TC is simplistic. The process is putting all of the indirect costs into one bucket and distribute based on the number of pieces produced. By using only one cost driver, the management is cheating themselves of valuable information and more accurate data. If the company is only producing one product then using TC might be the way to go. But once the company starts producing more then one product, to produce the most accurate financials they should switch to the more complex, but more logical, ABC method. Time Consuming – As with most processes, the more complex, the more time involved. TC, being simple and straightforward, is relatively quick to calculate. If time is of the essence, TC is the method to choose. However, if time is of no consequence, then ABC would be the best method, and more accurate. Allocation – The simplicity of TC starts at the consolidation of information and runs through the allocation. TC only uses one cost driver to breakup and distributes the indirect costs. Typically this driver is machine hours or labor hours. While ABC uses Activity Costing Pools, taking all

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