1. Calculate the overhead assigned to each product using the traditional cost system. 2. Calculate the overhead assigned to each product using ABC.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Under activity-based costing overhead cost are allocated based on cost drivers . Cost drivers are factors that stimulate activity consumption. Activities are work/Jobs that are related to product or service . However, under traditional costing system costs are allocated based on labour or machine hours . This leads to improper allocation of overhead allocation sometimes costs are under or over-allocated due to traditional costing system .
Activity-based costing gives better allocation of overheads as cost driver for each product/ Service can be recognised and allocated to product/ Serive that utilizes the activity
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