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Time based Activity based costing
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RUNNING HEAD: TIME BASED ACTIVITY BASED COSTING    1
Introduction
Costing
Costing system is the system which helps in determining the cost of the cost object particularly by two major steps which includes cost accumulation and cost assignment. Cost accumulation can be defined as the collecting of cost data such a way so that the cost can be adjusted to the products in an organized manner. The accumulated cost then can be assigned to different cost objects which can include a direct cost or indirect cost.
Overhead allocation to the product is important in a manufacturing company to have the proper pricing of the products. The organizations usually have used the traditional method of cost allocation which is a simple way of allocating the overhead costs. As per the traditional costing system the overhead is allocated on the basis of the one allocation rate like machine hours or direct labor hours. With this the cost of the product is allocated just on the basis of one allocation base irrespective of the different cost drivers used.
Traditional Costing:
Traditional costing system is the system where the cost centres are used by the company as the cost pools to which all the indirect costs are allocated to the cost objects with the help of the cost centres.
Traditional costing system is the system where the cost centres are used by the company as the cost pools to which all the indirect costs are allocated to the cost objects with the help of the cost centres. The company can use different methods of allocating the costs under the traditional accounting method which includes the direct method, step down method or reciprocal method. The steps that are used under the traditional costing methods are:
1) Identifying the indirect costs
2) Estimating the indirect costs for a particular time period
3) Analysing the usual cost driver like the machine hours, direct labor hours
4) Estimate the amount for the cost driver for the particular period.
5) Calculate the predetermined overhead rate which is calculated as (estimated overhead cost / Estimated cost driver)
6) After calculating the predetermined rate, we apply the overhead to the produces produced based on the predetermined overhead rate.
Traditional costing is one of the most simple method and can be easily implemented in all the organizations.
Activity based costing
The activity cost pool can be defined as the overall cost of the activity. Apart from that the cost driver changes the costs of the activity cost pool over the time, which affects the cost as well as the performance of the activity. In this, the indirect costs are first allocated to the activity and then to the cost object because of which the cost is allocated to the product properly. The following are the stages for the activity based costing: “(1) Identifying activities, (2) Defining the cost of the activities, (3) Defining the cost drivers of the activities, (4) Defining the volume of cost drivers, (5) Defining unit cost per cost driver for each activity and (6) Calculating the unit cost per product or service” (Cooper and Kaplan 1998; Bruggeman and Everaert 2007; Krumweide 1998).
The activity cost pool can be defined as the overall cost of the activity. Apart from that the cost driver changes the costs of the activity cost pool over the time, which affects the cost as well as the performance of the activity. In this, the indirect costs are first allocated to the activity and then to the cost object because of which the cost is allocated to the product properly. The following are the stages for the activity based costing: “(1) Identifying activities, (2) Defining the cost of the activities, (3) Defining the cost drivers of the activities, (4) Defining the volume of cost drivers, (5) Defining unit cost per cost driver for each activity and (6) Calculating the unit cost per product or service” (Cooper and Kaplan 1998; Bruggeman and Everaert 2007; Krumweide 1998).
Activity based costing was introduced to trace the overhead costs directly to the products using different cost pools. In the activity based costing the overhead costs are segregated and separated into different cost pools which has different cost drivers. Different products has different activities for each of the cost pools and the overhead costs are allocated on the basis of their activities and the cost rate for product. With the implementation of the activity based costing, the cost of the products can be identified more accurately. The overhead costs are allocated on the basis of their activities which helps in estimating the cost accurately. Some of the activities that are used in analysing includes shipping, handling, packaging, transferring etc.
With...