Activity Based Costing

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Business Finance


Read the article, Information Usefulness and Usage in Business Decision-Making: An Activity-Based Costing (ABC) Perspective. In a 4 to 6-page written report, written in an APA format address the following questions:

1. Job order manufacturing and process manufacturing are two major costing systems used in manufacturing. Answer the following questions regarding these two systems:

a. Compare and contrast the two costing systems.

b. Which costing system should a service firm, such as an advertising agency use?

c. How do these two systems provide decision-making information?

2. Describe activity based costing.

Give two examples where activity based costing is preferable over traditional costing.

a. How is activity-based costing useful for decision making?

b. Discuss the three overhead rate methods used in activity-based costing and consider their relative usefulness.

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Explanation & Answer

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Activity Based Costing
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Activity Based Costing
Information derived from monitoring the cost incurred by a business is very useful to
managers particularly in profitability analysis, cost control, and stock valuation such as
determining the products, services, or even departments that are most profitable and those need
more attention to improve. Cost accounting is one of the most beneficial tool for management,
aiding in business strategic decision making by determining the actual cost that is associated in
providing a service or manufacturing of a product by tracking all the expenses such as labor and
material among other expense involved in performing the process (Mansor, Tayles, & Pike, 2012).
There are various systems used in cost accounting where job order and process costing systems
are the main ones. Activity-based costing system and traditional costing system are used for cost
allocations. This paper is a report addressing given questions about these cost accounting systems.

Job order costing is a method applied where a company manufactures unique products as
per customer specifications or in identifiable batches or lots. The system determines the cost of
each unique product or job. The job as used here is a specific assignment or work performed as
per the customer requirements and instructions. This method accumulates cost by specific orders,
contracts, or a job since each assignment requires separate treatment hence considered as a distinct
entity (Anta & Iacob, n.d.). Examples of companies that use this costing system include
construction companies, furniture, interior decoration, professional services, aircraft, and auto
Process costing, on the other hand, is a costing system that accumulates costs of
manufacturing similar units of products in lots or batches employing consisted process. This



method determines the cost of each process and it is used in industries that produce similar or
identical products in huge quantities. Raw materials for production pass through different stages
or processes to be converted to a finished product, hence a process costing system accumulates
costs for each process involved. The total production cost is accumulated based on direct material
used and conversion cost, which is the sum of factory overhead and direct labor applied (Surbhi,
2015). Some of the industries that can use this method include cold drink industry, soap, paper,
paints, and steel among others.
Major differences and Similarities between Job Costing and Process Costing
The similarities and differences between the two costing system can be identified in the
comparison of their product costs flow. One of the identifi...

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