Question

The company I choose is Walmart.

Companies can choose from different costing methods: process/product costing and activity-based costing. Think about a company you know and answer the following:

• What are the differences between the two costing methods, and how do these apply to your company?
• What are some ABC cost drivers the company might use?
• How could the costs differ if one method is chosen over the other?
• Which method would you recommend for your company, and why?

Answer 1

1. Difference between the product costing and activity based costing,
   1. Product costing is relatively simpler method of allocation of costs to the product, wherein direct and indirect costs are allocated based in a pre determined rate, whereas in activity based costing, costs related with each activity involved in the production is identified and then the costs are allocated based on the number of cost drivers. Which is a very effective way than the product costing.
   2. Walmart is a furniture store wherein variety of types of furniture will be available, charging costs in such a situation based on number of units or any other pre determined rates is a blunder, the most effective way in such cases will be activity based costing.
2. ABC cost drivers a company may use,
   1. No. Of hours,
   2. Space occupied sq feet,
   3. No. Of customer order,
   4. Machine hours, etc;
3. Difference in calculations,
   1. Under product costing overheads are charged directly to the product, whereas under activity based costing, it is based on the number of cost drivers, based on the cost drivers consumed, there occurs a difference between the cost under product costing and activity based costing.
4. I would recommend activity based costing for sure without any second thought because, charging same cost for all the goods without considering any variation in terms of number of cost drivers used, leads to wrong charging of costs, eventhough one of the product uses only a part of the particular expense, product costing charges costs for all the products equally without differentiating the above point, activity based costing clearly bifurcates costs based on the amount of activity.