ABC is usually described as more accurate than traditional costing, but ABC is not GAAP. Why...

Question

Question

ABC is usually described as more accurate than traditional costing, but ABC is not GAAP. Why do you think ABC is not compliant with GAAP?

Answer 1

Answer #1

ABC Costing:

ABC costing is a type of costing that allocates cost of each activity to products according to the consumption of each

Example: Quality inspections , Purchase orders

Where as in a Traditional method of costing all overhead costs are allocated to company products.

Benefits of ABC costing

why ABC costing is not compliant with GAAP:

It is very difficult to make changes in company accounting system The official cost accounting system in most large company are stored in systems and this is more vulnerable to bugs
Product cost computed for external reports must include only manufacturing costs. Since ABC based costing excludes some manufacturing costs and includes some non manufacturing costs this is not in norms with GAAP.
Auditors are not satisfied with allocation that are made, based on the interaction with company employees
This kind of costing may be manipulated by management and used for making earnings and favourable for management

Answer 2

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