Product Costing - Traditional Methods and Activity Based Costing

Running head : ACTIVITY BASED COSTING IN MANAGING YOUR BUSINESS

Activity Based Costing in Managing Your Business

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Many companies these days are shifting from the traditional method of costing to activity based costing also referred to as ABC . The activity based costing method makes use of the company 's activities and allocates the proper costs to these activities . By the application of activity based costing , changes that could be made to improve an agricultural business and similar businesses . The case study of John and Mary Farmer 's

business is an example of this . Activity based costing may be useful to companies , there are still disadvantages so a comparison was made between the solutions presented in the case study and also made between activity based costing and the traditional costing method

Activity Based Costing in Managing Your Business

Generally , activity based costing is a method for developing cost estimates in which the project is subdivided into discrete , quantifiable activities or a work unit (1997 ) The method makes use of a business 's activities or work units and identifies the costs , whether direct or indirect , of these activities . In the case of John and Mary Farmer 's business , the proposed actions to better improve the farm used activity based costing

Using Activity Based Costing

Like most business owners , John Farmer sought to formulate a management schema that incorporates the current management style and could be used by the coming generations . By applying activity based costing , a schema was formed (refer to Figure 1 . Center Schema , not sure if this should be done ) they identified a number of cost centers majority of which is involved in the processing of crops

The same schema would be quite useful if it is applied to different kind of agricultural enterprise . Since agricultural enterprises generally involve the same activities , John and Mary Farmer 's business would be similar to other agricultural ventures . The deviation from the schema would be determined by what aspect of agriculture is used by the business (improve this . If the enterprise involved livestock , cost centers would include livestock maintenance , feeds and product harvesting to name a few

Although the schema would prove to be helpful to the business owner , the schema would become complicated if the business expands . Since not all businesses have the same format , expansion could be in the form of increased number of tenants , increase in the number of crops or in variation of the crops

As ABC uses activities of the business , the cost units vary from activity to activity . In the Farmer 's business , cost came in terms of acres , sales in dollars , hours , trips and more . This method of identifying the cost would be useful in terms of acknowledging all the consumed resources not just the monetary resources . However , the difficulty arises when it comes to data comparison . At first glance , the only comparable data are the ones in the same unit . There would be a need to convert all the units into a...