Activity Based Costing System

1) Governments use fund accounting instead of the traditional methods.  What are the key differences in that system?

Answer:

Key differences

Fund accounting | Traditional methods |

1) These accounting method does not focus on calculation of profits | 1) This method is designed to calculate profits |

2) Generally used by not profit making entities and governments | 2) Followed by organizations having a motive to make profit pout of business activities |

3) Fund accounting breaks down an organization into different funds and thus having individual balance sheets | 3) This methods treat the organization as a single entity and only one balance sheet is prepared |

4) Revenues are categorized to monitor restriction on their spending | 4) Revenues are categorized for better presentation and identifying operating and non operating revenues |

5) Follows modified accrual basis of accounting | 5) Follows accrual basis in principle |

Systems

Most organizations that use activity-based costing have two costing systems—the official costing system that is used for preparing external financial reports and the activity-based costing system that is used for internal decision making and for managing activities.

Answer:

Companies generally follow two costing systems, one that adheres to GAAP and other for internal reporting purpose.

* Costing for external reporting purpose

GAAP requires inclusion of all and only manufacturing costs, which in other terms is called as full costing. The absorption costing follows this principle, and all direct and indirect costs are taken into account to arrive at the cost of the product. So, companies generally use absorption costing for external reporting purpose.

Under absorption costing technique factory’s indirect costs are assigned or allocated to the items manufactured. This is done on the basis of volume such as the number of units produced, the machine hours used in production...