![]() Contradictory and uncertain cost estimates can be a problem when management needs to know precisely which products are profitable and which are selling at a loss. As a result, ABC and traditional cost accounting can estimate the cost of goods sold and gross margin very differently for individual products. In cases where the company has reason to question the accuracy of product cost figures, many firms turn to an alternative costing method: Activity-based costing.Īctivity based costing attempts to measure the costs of products and services more accurately than traditional cost accounting, ĪBC contrasts with traditional costing ( cost accounting), which sometimes assigns costs using somewhat arbitrary allocation percentages for overhead or the so-called indirect costs. Cost accountants know, however, that these methods sometimes deliver misleading information about individual product costs. Tracking product costs is a task for the firm's cost accounts, most of whom rely on traditional costing methods. This information can also be crucial for pricing, production planning, and product protfolio management. Accurate costing at the individual product level is essential for knowing which products are earning profits and which are selling at a loss. What is Activity Based Costing? Businesses move to Activity Based Costing to better understand the true costs of goods and services.īusinesses that sell goods and services have a critical need to know their costs for producing and delivering products, accurately. ABC vs Traditional Costing, Results Compared
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