Cost Accounting System Simulator
Compare and analyze the differences between Traditional Costing and Activity-Based Costing (ABC).
Input Data
Total Manufacturing Overhead
Per-Product Data
Product A (Cans)
Product B (Bottles)
Results: Overhead Cost Per Unit
Product A (Cans)
Traditional Costing
$4.80
Activity-Based Costing (ABC)
$3.79
Product B (Bottles)
Traditional Costing
$4.80
Activity-Based Costing (ABC)
$8.17
Analysis Summary
When applying Activity-Based Costing (ABC), the cost of Product B, which consumes more redesign activities, increased significantly. Conversely, the cost of Product A decreased. This demonstrates that ABC more accurately reflects resource consumption patterns.
Activity-Based Costing (ABC) Breakdown
Comparison of Costing Methods
Traditional Costing
Treats all manufacturing overhead as a single cost pool and allocates it to products using a single cost driver, such as direct labor hours or machine hours.
- Characteristics: Simple to calculate and less costly to maintain.
- Disadvantages: Can lead to cost distortion if products consume resources differently. For example, a low-volume, complex product might be under-costed.
Activity-Based Costing (ABC)
Identifies multiple cost pools based on activities that cause costs and allocates them to products using respective cost drivers for each activity.
- Characteristics: Provides more accurate product costing.
- Disadvantages: Complex and requires significant time and effort to implement and maintain.
Core Cost Concepts
Cost Classifications
- Product Costs: All costs related to manufacturing (Direct Materials, Direct Labor, Manufacturing Overhead). Treated as inventory until the product is sold.
- Period Costs: Costs not directly related to manufacturing (e.g., selling and administrative expenses). Expensed in the period they are incurred.
- Direct Costs: Costs that can be easily traced to a specific cost object (e.g., a product).
- Indirect Costs: Costs that are not easily traceable to a cost object and must be allocated (e.g., manufacturing overhead).
Cost Behavior
- Variable Cost: Total cost varies in direct proportion to changes in activity level, but the per-unit cost remains constant.
- Fixed Cost: Total cost remains constant within a relevant range, regardless of the activity level, but the per-unit cost decreases as activity increases.