Chapter 7, Problem 1Q

To determine

Activity based costing:

Activity based costing is analyzing the expenses with the help of activities. Monetary measure to the expenses and activity measure to the expenses shows difference with respect to the production cost, product cost and sales cost. Activity based costing helps to analyze the activity by segregating the cost associated with each activity.

Under traditional method, volume is the base for cost but under activity based costing, activity is the base for the cost.

Difference between activity-based costing and traditional costing methods.

Answer to Problem 1Q

Solution:

Activity based costing is activity based and traditional method is volume based. Both the method differs with respect to allocation of expenses, calculation of unit rates and analysis.

Explanation of Solution

1. Under traditional method, costs are divided into direct cost, indirect cost, fixed cost and variable cost. Although, under activity-based costing, costs are divided into unit cost, batch cost, product cost, organizational cost, etc., traditional method is a production-based outlook.
2. Activity based method is production and sales based. Under activity based method, it is easy to analyze how to manage the competition. There are so many ways to manage the competition like increasing the production, increasing the marketing, reducing the pricing, etc.Traditional method is useful in arriving at the accurate price of the product. Activity based accounting is helpful in analyzing the competition and how to arrive at the solution to overcome the competition.
3. Under job order costing, different jobs are recorded but not distinguished as per the nature of the job. Although, there are only three processes, but under activity-based costing, the grouping is as per the production and promotion which helps a lot.
4. Job costing is classification of the job as per the product or volume but under activity-based costing, classification is as per the nature of activity not the nature of the product.

Job costing and activity-based costing differs with the following points:

• Allocation of expenses.
• Unit rate of activity.
• Analysis for pricing and competition.

Conclusion

Activity based costing is activity based and traditional method is volume based. Both the method differs with respect to allocation of expenses, calculation of unit rates and analysis.