Question

6) In what ways does ABC product costing differ from traditional product cost methods?

8) How can ABC be used to improve customer profitability analysis?

Answer 1

6) ABC costing is to mean activity based costing i.e. costs are allocated on the basis of activity drivers based on cost segregation activity wise. For each unique activity a driver is identified and costs are allocated on the basis of the frequency of the driver. For example, setup costs for machinery is an overhead cost. The identified driver is setups done. The cost of allocated to each machine based on the number of set ups. However in traditional costing all the overheads incurred are clubbed together and allocated on a single predetermined driver which is usually number of machine hours or number of labor hours. In ABC costing costs are allocated only if overheads have been actually incurred for the specific product or process whereas in traditional costing costs are allocated to the product/ process or department irrespective of if costs are incurred or not.

8) ABC leads to better decision making and is useful in analyzing profitability, setting the prices for customers and determining the suitable production technique as well. Through ABC the direct and indirect costs can be better distinguished and only relevant product costs are included in customer profitability analysis. It helps in discontinuing products or services that do not add any financial value and also helps in improving customer satisfaction.