Write a professional memo to a coworker explaining how the switch from traditional costing to ABC...
Write a professional memo to a coworker explaining how the switch from traditional costing to ABC will impact the selling price of your company's products or services. Please give some examples.
Homework Answers
The major difference between traditional costing and ABC is related to the application of indirect overhead to products.
Traditional costing uses a single overhead rate by dividing total overhead cost with the cost driver . This rate is applied on all the indirect cost of the product.
Whereas on the other hand ABC assigns the cost to the product based on there actual consumption. The more the use of indirect cost towards the product the more indirect cost will allotted to it . Hence giving a difference in the pricing as compared to pricing arrived using traditional costing method.
Example 1
If two people are living in a room they will share all the expenses between them equally no matter if any one of the person is not at all using the thing. Like If one of them love to have grilled pizza at dinner he might order a oven . but on the other hand the other person living in the room does not think that it is necessity.
Now in this case even if the the other do not use the oven he will share the expense , this type is called as traditional costing.
In ABC the whole cost will be beared by the person who will be using the oven as this method is based on consumption.
Hence this will result in difference of costing for both the person
Example 2
If one of them wants hot water to bath he will like to install a geyser in the bathroom , whereas the other person is happy with cold water.
If simply the whole cost is divided into 2 it will like traditional costing.
Whereas based on consumption based costing i.e. ABC the whole amount will be expense of the person using the geyser.
The same you can apply in terms of product, product using the maximum amount of indirect cost will be allotted the maximum expense while calculating the pricing. Therefore it will impact the pricing of the product if we use ABC vs Traditional costing.
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Write a professional memo to a coworker explaining how the
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