Accounting is a vast subject wherein variety of techniques and methods are used to manage the financial aspects of businesses. Accounts and finance department of a firm holds majority of responsibilities and the overall growth possibility is judged.
One of the methods used by accountants in cost accounting is traditional costing system or also known as conventional method. The traditional manufacturing costing system is specifically used by manufacturing companies to basically determine the costs involved in making of products.
Traditional costing system for cost accounting attributes towards the allotment of manufacturing overhead expenses to the products made. This convention technique assigns or allots factoryâ€™s indirect expenses to the things manufactured on the basis on contents like the quantities of units made, the immediate working hours or the machine hours. Take a look through manuals as traditional manufacturing costing system homework answers to know more details.
Though traditional manufacturing costing system is a simpler method as compared to activity based costing system, still traditional costing system is not that accurate method. That is why, activity costing method was introduced just to overcome the weak points of traditional method.
Difference between traditional costing and activity costing
- Traditional costing system is much simpler and less time consuming than activity based costing system. Activity based costing system is complex and time consuming technique.
- Activity based costing system as compared to traditional costing system is more expensive for companies.
- Traditional based costing method is less accurate than activity based costing method as ABC method takes in consideration all the factors while allocation of product costs.
A look through traditional manufacturing costing system homework answers can help you clarify concepts.
Difference between traditional costing and activity costing:
When we think about accounts, we only consider it as some methods used by companies to execute their financial functions effectively. But when we will look from broader perspective, accounts and finance is used in day to day life too even at home also when you are planning to buy a car or planning a trip or any other activity.
So, to make these two terms more clear, letâ€™s take a simple example from your day to day life which will help you to differentiate between traditional costing and activity costing.
Take an example where you are staying with your roommate in an apartment. Now it is quite obvious that if you are living with your roommate, you will have to divide your cost of living as well. Here, cost of living includes each and every thing like rent of the apartment, various services and groceries etc. And you and your roommate can have many options to split the expenses.
First method which is quite simpler to find your share of expense, just add the cost of all the bills and expenses and then divide it into exactly two parts, this method closely resembles to the traditional costing system.
Second method includes specifically determining services and the groceries used by you and your roommate and paying for only those services which you rendered. For e.g. If in case you didnâ€™t use telephone services. Then you will not be supposed to pay for that. This method closely resembles activity based costing system.
From above example it is clear that traditional costing method is easy and less complicated one but activity based costing is more accurate method of cost accounting as it considers each and every aspect while calculating the expenses.
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