Question

1. What is the difference between "traditional" and "activity-based" costing?

2. What types of companies would benefit from ABC costing? Explain?

3. What is a supply chain? How can managerial accountants help to improve the supply chain?

4. Would you be more likely to invest in a company which disclosed information about their sustainable practices? Why? Why not?

Answer 1

1. Traditional Costing Method

Traditional costing systems apply indirect costs to products based on a predetermined overhead rate. Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing is optimal when indirect costs are low compared to direct costs. There are several steps in the traditional costing process.

1. Identify indirect costs.

2. Estimate indirect costs for the appropriate period (month, quarter, year).

3. Choose a cost-driver with a causal link to the cost (labor hours, machine hours).

4. Estimate an amount for the cost-driver for the appropriate period (labor hours per quarter, etc.).

5. Compute the predetermined overhead rate (see below).

6. Apply overhead to products using the predetermined overhead rate.

Predetermined Overhead Rate Calculation

Predetermined Overhead Rate = Estimated Overhead Costs / Estimated Cost-Driver Amount

For example:

$30/labor hr = $360,000 indirect costs / 12,000 hours of direct labor

Activity-Based Costing Benefits

Activity based costing systems are more accurate than traditional costing systems. This is because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more costly to implement. The leap from traditional costing to activity based costing is difficult.

Traditional Costing Advantages and Disadvantages

Traditional costing systems are simpler and easier to implement than ABC systems. However, traditional costing systems are not as accurate as ABC systems. Traditional costing systems can also result in significant under-costing and over-costing.

2. Activity-based costing is an approach that allocates fixed overhead and administrative costs to activities, which are cost-incurring events. Activity-based costing assigns costs to those factors and activities that have a direct cause and effect relationship with a particular overhead cost. The approach then allocates the activity costs to those products or services that actually require the activities.

This Activity Based costing is beneficial to:

a. Manufacturing industries

b. Construction Business

c. Health Care Business

3.  Supply Chain is the sequence of processes involved in the production and distribution of a commodity.

Management accounting in supply chains (or supply chain controlling, SCC) is part of the supply chain management concept. This necessitates planning, monitoring, management and information about logistics and manufacturing processes throughout the value chain. The goal of management accounting in supply chains is optimizing these processes. This strategy focuses on supporting management.

It supports the following functions

• Planning
• Monitoring and control
• Information supply
• Coordination
• Rationality and reflection

4. Substantial Practices are the companies crucial practices and operations. These activities generally will not be diclosed by the company to outsiders

I will invest in the company which dicloses their substancial practices to outsiders