Initial post please answer the questions below in one to two paragraphs select any company that comes to mind
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?
- Please respond to two peers one paragraph is sufficient:
- 1. Cameron
There are some major differences between Activity-Based costing(ABC) and Process/Product based costing methods. The ABC method is a system that assigns cost to the company’s activity center rather than the products produced by those activities. So basically it places value on the specific activities the company performs, then it assigns a specific cost to each individual unit that is produced. The Process/Product method is a form of allocating direct and indirect costs to individual units of product, which basically means they assign cost based on an average overhead rate. The company I chose, Bauer, which is a hockey company, uses a process/product based costing system. They most likely use this form of costing because they produce many products specifically skates, gloves, shoulder pads, shin pads, sticks, apparel etc. The reason they use this type of system is because they produce large quantities of product at a time but may only sell one at a time, also it is much easier to keep track of than the ABC method. They also don’t accrue large amounts of overhead cost because they don’t require skilled workers, etc. A cost driver is something that directly influences activities of a business. Bauer Hockey could run into many cost drivers like product cost, material cost, etc. If a company like Bauer tried to use the ABC method it would be a disaster as it would slow production down due to all the regulations that need to be met, products might not be fully completed as well. I would continue using the process/product costing system because Bauer mass produces products, using the same production methods, labor, and produce the same products throughout.
Taylor, E. (2016, October 26). Activity-Based Costing vs. Product Costing. Retrieved from https://smallbusiness.chron.com/activitybased-costing-vs-product-costing-57891.html.
Bauer Inc. (n.d.). About Bauer. Retrieved from https://www.bauer.com/
There are many differences between the Activity-Based Costing (ABC) method and the process/product costing method. For starters, ABC identifies a company’s activities, AKA types of work or actions, and then assigns costs to the units produced by the company. It places worth on the specific activity performed by the company, then assigns a proportionate cost to every individual unit produced. Product/Process costing (AKA Traditional costing), essentially assigns costs to products based on an average overhead rate. My dad works for Wise construction in Boston, MA which uses the ABC method when working on jobs. They use this method because usually the jobs require massive amounts of overhead (permits, bond purchases, machinery and products, skilled employees, etc.). If a construction company tried to use the process/product costs method, it could be difficult to get accurate totals since a project would need to be finished in entirety for accurate numbers. Since Wise construction does not produce mass buildings or products, the Process/Product cost method would not be ideal. A cost driver is something that directly influences the activities of a business. Wise construction could potentially run into many cost drivers like direct labor hours, number of products returned from customers, and number of machine hours. I would continue to recommend the ABC method because the company offers a broad spectrum of manufacturing (contracting, plumbing, electrical, etc.) and they use varying amounts and types of products for different projects.
Taylor, E. (2016, October 26). Activity-Based Costing vs. Product Costing. Retrieved November 12, 2019, from https://smallbusiness.chron.com/activitybased-costing-vs-product-costing-57891.html.
Warren, C. S., Reeve, J. M., & Duchac, J. E. (2018). Managerial accounting (14th ed.). Boston, MA: Cengage Learning.
Hayden, A. (2014, June 25). Activity-Based vs. Traditional Costing. Retrieved November 12, 2019, from https://quickbooks.intuit.com/r/pricing-strategy/activity-based-vs-traditional-costing/.