Activity Base Costing

Introduction

When the word of ‘competition’ appeared, the first thing that we tend to think of it might be something that take place in the stadium such as football match, athletics, swimming, diving and etc. However, in today’s world, the largest competition is not longer only for those sport activities, but it is between all the organizations in the business field, where there might have no ending. Every day, firms compete with each another by providing goods or services to customers with a highest price possible while keeping the costs as low as possible. Hence, it led companies to adopt different type of manufacturing concepts to enhance the income by reducing the time and cost taken to reach the markets. Some common concepts that adopting by the companies will be information technology (IT), total quality management (TQM), just-in-time (JIT) and so on. Hence, in order to keep the costs low and to be remain competitive, management accounting (MA) is playing a very important role in every business, where it measures and reports both financial and non-financial information that helps the managers in planning, decision making, controlling and evaluation in the organization (CIMA, cited by Mangena, 2010a). There are number of techniques to be study and use. But, in this essay, we are just going to discuss the two common costing systems, which are the Activity Based Costing (ABC) and Traditional Costing System (TCS).

Definition of Traditional Costing System (TCS)

TCS has been used in the management accounting system since 1920s. It is well-known fact that TCS utilize a single, volume-based cost driver. They assumed that cost is incurred when a product is produced. But, this assumption only suitable for certain direct costs and it does not work for the costs (overhead or indirect costs) which are not directly performed to the product units (Dr. Carl Marx, 2009). In today’s business environment, companies are being more customers orientated and it came out a lot...