Product Costing - Traditional Methods and Activity Based Costing

Product Costing - Traditional Methods And Activity Based Costing

Introduction

Moving away from traditional methods , activity based costing was developed to provide more accurate ways of assigning indirect costs and support resources to activities , business processes and products and customers . The goal of ABC is not to allocate common costs to products rather it is to measure and price resources used for activities that support production

ABC is best used when the company is large in size , makes different kinds of products , its products are low-volume , and the variable costs directly

related to the products are much less than the fixed costs which need to be taken into account

Thus , for a company like Steinway Sons , leading manufacturers of quality pianos , ABC may be a better option than traditional product costing methods . Traditionally , fixed overhead costs were allocated based on activity levels . However , by allocating fixed costs on as per unit basis , many researchers argue , that they are in fact being treated like variable costs , which is against the nature of the costs . Thus , it is better to consider some costs as variable , while in ABC fixed overhead costs are allocated on a batch level rather than on a unit level , which may adversely affect decisions regarding the number of units to produce

This article will firstly show a number of reasons why Steinway Sons should follow the ABC way of product costing . Then it will discuss how not following the ABC can harm the company or some of the decisions which can go wrong

How Steinway works

The process of how Steinway makes its pianos is a unique one . First the inner and outer piano rims are bent into shape as a continuous shape unlike other pianos . Then using a patented Steinway design , the soundboard is designed in a shape of a dome , with slightly thinner edges , to vibrate properly thus amplifying the sounds of the keys However , before placing the soundboard , the bridge is notched for strings

The veneer of each piano is cut from a same tree to maintain its cosmic beauty . Then the piano case is made , ensuring it supports the piano rim A cast iron plate is fitted , which provides a stable foundation to withstand pressure . The arms of the piano are then shaped

After this , the strings are inserted in the piano . Then using action weigh-off each key is ensured to be consistent . Voicing process allow minute adjustments to ensure distinctive sound and personality of each piano . After the piano has been regulated , it is ready for its final inspection

Using Activity Based Costing

For a company such as Steinway Sons , it is best to follow ABC rather than relying on the traditional method of allocating fixed overhead costs . The following shows why

Firstly , traditional costing systems accumulate costs according to different departments . These costs may not be variable only , in fact they are usually mixed , that is , they are composed of variable and fixed costs . Also , they are not necessarily caused by one factor...