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Compare the impact of the activity-based costing model and the traditional based costing model on overhead allocation

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Introduction

Compare the impact of the activity-based costing model and the traditional based costing model on overhead allocation Accuracy of costing is related directly to the decision-making and control of a company, and also related to the continuing operating of the company. With the development of the environment around the company, the traditional based costing model could not provide accurate and useful information for the company's decision-making and control. It may lead to a decline in the overall profit level. According to Atrill (2007) the traditional based costing model brings the indirect costs to the produce center by a single standard and allocating the indirect cost in the product centre to products or service by direct labor-hour or machine hours. Atkinson (1995) points out that the activity-based costing (ABC) trace indirect and support expenses accurately to individual products, services and customers. This report aims to compare the impact of the two methods on overhead allocation. Firstly, the author will take a company for example to illustrate the problem of the traditional based costing. Then, the author will apply the case demonstration to analyze the effect of the activity-based costing on overhead allocation. After that, the author will compare the result of calculation by the traditional based costing and the activity-based costing. ...read more.

Middle

(2)=(1)�60,000 (3) (4)=(3)�15,000 (5)=(1)+(3) Direct materials $1,125,000 $18.75 $675,000 $45.00 $1,800,000 Direct manufacturing labor 600,000 10.00 195,000 13.00 795,000 Direct mold cleaning and maintenance costs 120,000 2.00 150,000 10.00 270,000 Total direct costs 1,845,000 30.75 1,020,000 68.00 2,865,000 Indirect costs of activities Design S3 135,000 2.25 450,000 CL5 315,000 21.00 Setup of molding machines S3 75,000 1.25 300,000 CL5 225,000 15.00 Machine operations S3 450,000 7.50 637,500 CL5 287,500 12.50 Shipment setup S3 40,500 0.67 81,000 CL5 40,500 2.70 Distribution S3 261,000 4.35 391,500 CL5 130,500 8.70 Administration S3 192,453 3.21 255,000 CL5 62,547 4.17 Total indirect costs allocated 1,153,953 19.23 961.047 64.07 2,115,000 Total Costs $2,998,953 $49.98 $1,981,047 132.07 $4,980,000 (Horngren, 2009, p177) Table 3 compares the traditional based costing model Plastim had been using and the ABC model. Note three points in Table 3, firstly, the ABC system combines more costs as direct costs. In the direct-cost categories, the traditional based costing model combines two costs and the activity-based costing model combines three costs; Secondly, the ABC system creates the same cost pools linked to different activities. In the indirect-cost pools, the traditional based costing model links to single activity, but the activity-based costing model links to six activities. ...read more.

Conclusion

This report compares the impact of the traditional based costing model and the activity-based costing model on overhead allocation by case study. We can see that the ABC model on overhead allocation provides more real breakdown of product costs. It can allow managers to recognize the influence of quality control and product quality improvement cost. It is able to provide the manager with accurate measurements so that they can make decisions correctly. As when the enterprise uses the ABC model to allocate overhead, many activities are very detailed, it can also provide management for the companies specify budgeted costs for activities and use budgeted cost rates to cost products. However, when the enterprises decide to use the ABC model, the management should take into more consideration of its framework. Reference Atkinson, A (1995). Management accounting. 2nd ed. NY, Prentice Hall. Atrill, P (2007). Management accounting for decision makers. 5th ed. London, Financial Times Prentice Hall. Horngren, C (2009). Cost accounting: a managerial emphasis. 13th ed. London, Pearson. Kaplan, R(1998). Cost and effect: usting integrated cost systems to drive profitability and performance. Boston, Harvard Business School Press. Turney, B (1996). Activity based costing: the performance breakthrough. London, Kogan Page. ?? ?? ?? ?? ...read more.

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