Traditional Costing and Activity Based Costing Approaches Essay

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Activity-based Costing is a potent tool for an organization and assists in obtaining accurate and efficacious cost for precluding cost misrepresentation that may give rise to sustainable development and growth. Activity-based costing (ABC) was established and has been promoted as an approach of overcoming the systematic falsifications of traditional cost accounting and bringing significance back to managerial accounting. In particular, a traditional costing system reports the amount of money that is spent and by who, but its shortcomings lie in the fact that it does not report the cost of activities and processes (Mahal and Hossain, 2015). ABC systems attain product costs that are more precise in comparison to those reported through the use of multiple cost drivers to follow the costs of activities of a manufacturing procedure of the products that consume the resources utilized in those activities. The ABC system is purposed to offer the most conceivable benefit at the least general expense. In contrast, the traditional costing system does not have the capability to ascertain actual product or service costs in an accurate manner. The system also lacks the capability to provide beneficial information to management for the objective of making vital operating decisions (Mahal and Hossain, 2015). Subsequent to carrying out ABC system, a company is able to examine its consumers and offer precise data and information. In turn, management may have the capability to position general customer value in addition to their profitability. This cost information enables the company to utilize target resources, which may give rise to more superior customer value (Mahal and Hossain, 2015).



Activity-Based Costing (ABC) is recommended for apportioning overheads to each of the activities in the course of making products. It was a substitute for the traditional method, which encompassed the allocation of overheads based on time and the number of units being produced.

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The research study by Ali et al. (2015) measures the magnitude of ABC execution in the Riyadh region of Saudi Arabia. The outcomes of the study indicate a significantly high usage of ABC costing systems amongst the companies, especially the private corporations, with business operations in the Riyadh expanse of Saudi Arabia. In particular, the study reveals that approximately 94% of the participants employed the ABC costing system. In addition, the research indicates that the system was relatively equally common amid managers at the top-most, middle, and bottom-most level. Correspondingly, the ABC system was being implemented in just about all the corporations comprising of well-known firms such as SABIC and Almarai. Furthermore, research indicates that the ABC costing method was prevalent amongst corporations having several and more diversified products and operating in a competitive business environment. Research ascertained that ABC costing system facilitated companies in internal management, pinpointing significant cost drivers, decreasing production expenses and having a general benefit for consumers. The general perspective of managers in the Riyadh region is that carrying out ABC costing system gives rise to decreased prices, higher quality, and enhanced execution and is useful in product development (Ali et al., 2015).



Businesses are presently operating in severely competitive settings to make important process enhancements in aspects such as innovation, quality and productivity. This is largely for the reason that the customer anticipates more product choices at decreased prices, with superior quality and prompt delivery. The research study by El-Gibaly and Diab (2012) examines the incorporation of the activity-based costing system as well as the balanced scorecard method in North America, specifically companies in the Egyptian market.….....

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References

Al-Hroot, Y. A. K., Saadat, A. A. D. M. M., & Amireh, L. (2015). The Effect of Activity-Based Costing on Companies Financial Performance: A Study among Jordanian Industrial Shareholding Companies. European Journal of Business and Management 7(35).

Ali, S., Malo-Alain, A. M., & Haque, M. I. (2015). Impact of activity-based costing on firms' performance in Saudi Arabia. Science International Journal, 27 (1); 597, 606.

Bahar, M. N. (2014). An Investigation on Adoption and Non-Adoption of Activity-Based Costing (ABC) in Plastic Industry in Iran. Middle-East Journal of Scientific Research, 22(9), 1377-1389.

El-Gibaly, M. M., & Diab, A. A. A. (2012). A model to integrate of the ABC and the BSC in the Egyptian companies: aligning strategic efficiency and performance improvement (field study). Journal of American Science, 8(6), 543-554.

Mahal, I., Hossain, A. (2015). Activity-Based Costing -- An Effective Tool for Better Management. Research Journal of Finance and Accounting, 6(4).

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