Discuss and highlight the pros and cons of adopting a TC and an ABC.
Easy and fast. Not so accurate
Cheaper to implement Each time a unit of product is manufactured, it is assumed that cost is incurred. This assumption makes sense for certain direct costs. This assumption will not work for activities that are not performed directly on the product units.
Aligns with GAAP The problem with this approach is that for most overhead activities, the proportions of the activity actually consumed by a specific product, does not universally correspond with a single cost driver. This holds true for most modern companies where products are produced by a combination of manpower and technology.
Accurate Complicated…show more content… assign manufacturing costs only to products
Traditional accounting fails to allocate nonmanufacturing costs that also are associated with the production of an item, such as administrative expenses or determine which overhead costs actually affect specific products, hence not so accurate. More accurate because it takes important factors into account before assigning a cost to a product. It is more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs.
Traditional accounting in external financial reports because it provides a value for the cost of goods sold. Internal use - decision-makers will be able to see all relevant spending and can document all indirect costs accurately.
Easy and fast. Since it relies solely on assigning average overhead rates Complicated and time consuming
Cheaper to implement Costlier to implement
Gives information on what is spent, but not why it is spent.
Discuss the practical difficulties in adopting an ABC over a TC. And how to overcome…show more content… Employee resistance - ABC requires patience from both management and all other related departments during the development phase. Indeed, statistics have shown that many of the companies attempting to develop and implement ABC have failed during the development phase. ix. ABC requires packaged software. Unfamiliarity with this software may cause problems such as staff resistance to change.
x. Organizational changes are essential with the use of ABC
These can be overcome by
● Providing training to the person implementing and using it.
● Since ABC is embedded in a behavioral and organizational context that defines the programs and innovations that are implemented, it is important that an ABC implementation strategy be focused on these behavioral and organizational variables
● Understanding the need for thorough analysis of costs and benefits, accountants must be trained to realize the benefits.
● Companies must know that the decision to adapt Activity-Based Costing depends on the type of products they manufacture, and not on the size of the company.
● Thorough understanding of the business operations is needed which guides the path for the new system.
Reason why ABC is preferred over TC in this case i.e. benefits of adopting