Non-manufacturing cost are not assigned to products, these costs relates to selling, distribution and servicing specific products. There are two types of non-manufacturing costs, directly traceable non- manufacturing costs and indirectly traceable non-manufacturing costs. Manufacturing costs are assigned to products, these costs includes salaries, and cost of supplies used and are assigned to products in a traditional absorption costing system (Garrison, Noreen & Brewer, 2015). Cost pool is a grouping of individuals costs typically by department or service center. They are commonly used in the allocation of factory overhead to units of production.
Garrison, R.H., Noreen, E.W., Brewer,P.C.(2015).Managerial Accounting (15th Ed). Retrieved from:https//phoenix.
#5 Activity Based Costing vs. Traditional Costing (Student)
Here is a video that goes over the differences of traditional costing and ABC. The following is a recap of the video link below.
Traditional costing- With this form of costing the firm will use one plant wide overhead rate in that they look at an overall firm rate for the whole company or factory. It is easier to compute one firmwide rate making this method much easier. Traditional allocated product costs. This method does better with allocating direct cost that is easy to determine but no so much with overhead and identifying several cost drivers. One advantage is the totals found can be used for external reports. This method is still able to use direct and nondirect costing along with overhead meaning we can use just one method. A disadvantage is this method is less accurate due to it looks at overall costs for a firm and not just allocating it to each driver being more specific.
ABC- Uses many different overhead costs for many different products and groups of products. This can be overhead totals for different groups of products with many different overhead totals. Multiple activity rates put into cost pools. This method can be more difficult due to having to compute many activity rates and the different overhead costs along with having to interview workers to gather more intel about the different cost drivers. A downfall is workers will not like it due to so much work involved. ABC allocated period costs which can be more helpful over product cost. Allows to allocate overhead cost better. A downfall is that the totals found in this method cannot be used in external reports. This method is great for just overhead costs, but there is still a need for a direct method of calculating costing meaning ABC needs to still use traditional costing making even more work. An advantage is this method is more accurate allocating costs more closely to problems and drivers that are not seen using other methods.
In closing of the video, I see how traditional costing is helpful throughout the year, and it is required for ABC anyway. On the other hand, ABC is more accurate and would be very much needed for big decisions like to cut a product line. I see the benefit for both, and I agree with a point made in the video about how there must be a line to draw based on saving cost and time for a method.
#6 Targeting process improvements (Student)
Activity based costing can be used to identify activities that would benefit from process improvements, which is referred to as activity based management. Activity based management focuses on reducing defects and decreases processing time. Activity based costing can help determine what may need to be improved within a business (Garrison, Noreen & Brewer, 2015). Benchmarking is also used to determine what may need to be improved. Benchmarking is used to compare the performance in an organization with the performance of other similar activities.
Garrison, R.H., Noreen, E.W., Brewer, P.C. (2015). Managerial Accounting (15th Ed). Retrieved from: https://phoenix.
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