Question

A question that I need clarified is why would a manufacturing company choose to use a traditional costing system over an activity-based costing system? After reading the chapter it appears that an activity based costing system is by far the superior system.

Answer 1

Answer :

Companies need accounting systems to track the costs of their operations. Two of the most commonly used systems are traditional costing and activity-based costing. Traditional costing is easy to use and inexpensive to implement, while activity based costing is more complex  but gives greater accuracy.Traditional costing adds an average overhead rate to the direct costs of manufacturing products and is best used when the overhead of a company is low compared to the direct costs of production. Activity-based costing identifies all of the specific overhead operations related to the manufacture of each product.

A fundamental difference between traditional costing and ABC costing is that  traditional costing assigns overhead based on a single overhead rate, while ABC assigns overhead based on several cost pools and the activities that drive costs. ABC costing is by far a superior system when the manufacturing process is technology driven and overhead increases based on various activities that differ for each product.