Managerial Finance Traditional Costing System

Question: Discuss about the Managerial Financefor Traditional Costing System. Answer: Introduction: Costing is a technique used by the companies to assigning the cost to each and every element of the production house of the company. A effective costing system offer the information to the company for minimizing the cost and waste. Costing system is used by every production house to understand the costing system and it helps the company to generate more profits. The main objective of this paper is to analyze and evaluate the activity based costing and traditional costing system. Traditional Costing System: Traditional costing system is the older technique to assign the cost to each element of costing. It uses the single cost drivers volume thus the product cost get distorted. It is assumed in this technique that costs are related to production only but in reality some costs are related to administrative work too which do not have any connection to production. Main issue with this costing system is that it directly allocates the cost to products not the activities (Garrison et al, 2010). It allocates a few amounts to the indirect cost. In this technique, expenses are allocate to cost centers first and products later on. Activity Based Costing: This technique has been implemented to reduce the errors in costing. In this technique, overheads are allocated to activities first and product or services later on. It takes a basis of performance, expenses and consumption. This technique is quite different from traditional costing system (Weygandt, Kimmel, Kieso, 2015). This technique is quite helpful for the companies to allocate the right cost to the right cost element. Key Differences: Traditional costing system is based upon the total overhead cost only whereas depth information is required in activity based costing to allocate the expenses. Traditional costing system follows the simple rule to allocate the cost whereas activity based costing formulas is quite difficult (Rasiah, 2011). Traditional costing system identify few categories to allocate the cost whereas many elements are identified by the ABC system to allocate the overheads. Traditional costing allocate the overheads to the individual product in indirect overheads whereas ABC costing allocate the overheads according to their nature. Advantages and Disadvantages: Advantages: ABC costing helps the production house to get the estimation about the single service or product accurately. It identifies the activities and products which are non profitable for the company to make better decisions. It is less cost and time consuming technique. It differentiates the products that require less resource. The calculation of this technique is quite easy. The profitability gets increase of the company due to this technique. Disadvantages: It is not a scientific approach. The results provided by this technique is quite complex. It is based upon some old techniques which is not helpful in current scenario. It manipulates the decision of the manager (Kaplan Anderson, 2013). Many challenges are faced by the managers due to this technique. It is based upon less information. Conclusion: Traditional costing system as well as activity based system is equally important for an organization to understand about the cost of the company. ABC is the substitute to the traditional costing system as some issues was there in the traditional costing system so activity based costing system has been implemented. This system helps an organization to make better decisions about the production, products, service or cost of the product. Thus it can be concluded that both the system are important for the organization. Traditional costing system has some issues with its technique but the overall advantages of this system are better. A company must adopt the technique according to the requirement and the nature of the operations of the company. References: Garrison, R. H., Noreen, E. W., Brewer, P. C., McGowan, A. (2010). Managerial accounting.Issues in Accounting Education,25(4), 792-793. Kaplan, R., Anderson, S. R. (2013).Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press. Rasiah, D. (2011). Why Activity Based Costing (ABC) is still tagging behind the traditional costing in Malaysia?.Journal of Applied Finance and Banking,1(1), 83. Weygandt, J. J., Kimmel, P. D., Kieso, D. E. (2015).Financial Managerial Accounting. John Wiley Sons.