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The Importance of Choosing the Right Costing Method Costing methods are accounting systems that are used to track operations, determine the cost associated with producing products or providing services, and analyze cost elements. Cost elements include aspects such as labor, materials, overhead expenses, and other components that help accurately calculate the total cost per unit or per service. It is essential for businesses to choose a costing method that fits their needs because the method that they choose will impact their pricing decisions, financial performance, as well as profit margins. By choosing the costing method that is right for a business, the company will be able to obtain optimal cost control and implement the best pricing strategies. There are two costing methods that are utilized for allocating indirect overhead costs to their products: traditional costing, and activity-based costing (ABC) (Noreen et el., 2023). Traditional Costing Method VS Activity-Based Costing Traditional costing and activity-based costing methods calculate estimated overhead costs that are related to the production of goods or services and then use those costs to apply them to the products based on the cost driver(s). The traditional costing method applies the overhead on the basis of a single cost driver such as direct labor hours, direct materials, number of units produced, etc.. This method is best utilized in circumstances where the company has low overhead compared to the direct costs of production. Traditional costing is simpler compared to other costing methods and less expensive to implement, while still providing an accurate picture of product costs. The activity-based costing method is a more complex, yet more accurate way of tracking product costs. This method identifies all the operations that are related to the manufacturing of each product because not all products require support of all overhead costs. The ABC method begins with assigning direct costs to cost drivers and then assigns the costs to the products based on their usage of the cost drivers. This method is more accurate however it can be expensive to implement and is more beneficial for companies who have high overhead costs and manufacture products over companies that provide services (Mishra & Vaysman, 2001). Which Costing Method Would a Small Business Ice Cream Shop Benefit From? For a small business ice cream shop that does not manufacture their own ice cream, traditional costing would be the more financially beneficial costing method to use. This is because the ABC method is more complex and expensive to implement, and for a business with a simple structure and low overhead traditional costing would make more sense. For example, in this scenario the traditional costing method would apply the overhead costs to direct labor since

they do not manufacture any products and only provide one service. However, if the ice cream shop decided to grow their business or start manufacturing their own ice cream, it may be beneficial for them to implement the ABC costing method to supplement the traditional method. When implementing the ABC method, the shop could use direct materials as well as direct labor hours as cost drivers to allocate the overhead to because the manufacturing of different ice cream flavors will require different ingredients and may even need more time to manufacture than others (Nartey & van der Poll, 2021). References Mishra, B., & Vaysman, I. (2001). Cost-System Choice and Incentives--Traditional vs. Activity- Based Costing. Journal of Accounting Research (Wiley-Blackwell), 39(3), 619–641. https://doi.org/10.1111/1475-679x.00031 Nartey, S. N., & van der Poll, H. M. (2021). Innovative management accounting practices for sustainability of manufacturing small and medium enterprises. Environment, Development and Sustainability, 23(12), 18008-18039. https://0634a7bpi-mp03-y-https-doi-org.prx- keiser.lirn.net/10.1007/s10668-021-01425-w Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2023). Managerial accounting for managers (Ser. 6th Addition). McGraw Hill LLC.

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