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Thursday, 27 June 2013

A comparison between standard costing and activity based costing

Accounting enables managers to make wise business decisions including cost cutting, profit maximization and quality production. There are different ways of costing: traditional and modern costing. Standard costing is an example of traditional costing while activity based costing is a modern way of costing. In the former example the company calculates the cost by predicting future expenses and how the market is going to turn out and fixed its commodity price based on that while the latter focuses more on the current expenditure. It looks on how the market is at the moment and bases it costing on that.

In standard costing the three elements of costing includes direct material, direct labour and overhead expenses. This are calculated and apportioned to outputs in order to provide unit production costs. There are four types of standard costing; ideal standards, normal standards, basic or bogey standards and current standards.

The main advantage of standard costing is that it is easier to implement and it is also compatible to other management technics such as in benchmarking. Its weaknesses are that it fails to provide a framework for the diagnosis of all costs. There is also little basis for choice of standards to be used and this makes the approach arbitrary and reliable.

Activity based costing focuses on the audit of all activities in the organization. It is highly compatible with modern approaches. It provides a good basis for organizational performance by facilitating continuous improvement. It also comprehensively considers all cost. It also has a positive feature in that it allows for the separation between costs based on accurate measures such as time and resources spent per product, it also facilitate a through audit processes. It also makes it possible for organization to diagnose hidden cost.

Its main disadvantage is that it’s tend to be complicated and expensive

Comparative analysis focus on Ford motors
Ford motors is a vehicle manufacturing industries based in the UK, Ford motors used standard way of costing in the years 1980 and 1990, but after the introduction of the modern way of costing including the ABC it has decided to adjust due to the competitiveness of the market, after analyzing the two ways of costing the company has decided to pick the positive aspects of the two methods. This was very necessary for them to achieve the most gain in there company while minimizing the cost of doing business.

In conclusion both standard costing and ABC are very usefully to any company, a company will need to pick the advantages of each method and apply to its system. For example standard costing is good used when a company wants to achieve consistency while ABC is good for a through audit of the organization performance.

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  2. Another disadvantage of standard costing is its overhead allocation factor, typically a single one, has a non-causal relationship with the product costs. Hence some are over-costed and the others under-costed because it is zero-sum error.

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