Traditional vs. ABC Overhead Allocation Methods

TRADITIONAL VS. ABC OVERHEAD ALLOCATION METHODS 3

Traditionalvs. ABC Overhead Allocation Methods

Traditionalvs. ABC Overhead Allocation Methods

Costingis an important part of business accounting strategies, used todetermine costs incurred during manufacturing in relation to therevenue obtained per product (Johnson, 2014). There are two notabletypes of costing, namely traditional and ABC overhead allocationmethods. Activity based costing (ABC) is the one which comes up withall those activities relating to production, assign cost to them,thus determining the production cost. On the other hand, traditionalmethod of costing is the one that assign cost of every product inrelation to the average production overhead (Hayden, 2014).

Thereare various reasons why ABC method is superior as compared to thetraditional method of costing. First, ABC offers a greater level ofaccuracy, as costs are only assigned to products which calls foractivity for production (Johnson, 2014). In my work place, thismethod has been embraced and has gone a long way to eliminate chancesof allocating costs which are irrelevant. The other notable advantageof ABC method is the fact that, costs can easily be interpreted bythe internal management, thus acting as an enhanced benchmark forunderstanding the overhead costs. However, it is worth noting that,implementation of ABC system of costing need substantial amount ofresources, thus can acting as a barrier to those firms having limitedresources. Further, as compared to the traditional method, ABC isprone to misinterpretation, especially if handled by unqualifiedpersonnel (Hayden, 2014).

Inmy own perspective, I would encourage firms to adopt the ABC methodof costing instead of the traditional one. This way, firms will enjoygreater levels of accuracy in their costing activities, hence higherprofitability both in the short and the long-run.

References

Hayden,A. (2014). Activity-Basedvs. Traditional Costing.Available at

http://quickbooks.intuit.com/r/pricing-strategy/activity-based-vs-traditional-costing

Johnson,R. (2014). TraditionalCosting Vs. Activity-Based Costing.HearstNews Paper. Availableat

http://smallbusiness.chron.com/traditional-costing-vs-activitybased-costing-33724.html