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?

Question

Sage Parker

Business

5 July, 13:26

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?

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Karlee Arroyo · Answer 1

1. Product based costing Process costing is a form of operation costing that is used to determine the cost of a product at every process or stage of its manufacture. The costs are averaged based on the units produced during this period. Product/Process costing is suitable for industries that produce homogeneous products and where the production is a continuous flow.

Activity-based costing (ABC) is a costing method which identifies activities in an organization and then assigns the cost of each activity to every products and services based to the actual consumption by each. Activity based costing assigns more indirect costs into direct costs.

2. In activity-based costing, an activity cost driver influences costs of labor, maintenance, and other other variable costs. The cost drivers are vital in ABC, as they influences a business activity. An example of cost drivers include direct labor hours. If the cost of the labor is high, it will increase the cost of production of the company's products or services. Also, if the cost of warehousing is high, it will also increase the expenses which is incurred for product manufacturing.

Other cost drivers are machine hours, number of engineering change orders, number of customer contacts, number of product returns, and the machine setups that are required for production.

3. Although, both methods estimate overhead costs that are related to production, the product/process based costing is more simplified and also less accurate than the activity based costing.

4. I will recommend activity based costing as it is more accurate and also provide a more precise breakdown of the indirect costs.

The differences are in the accuracy and complexity of the two methods.