Companies can choose from different costing methods: process/product costing and activity-based costing. Think about a company you know and answer the following:
- What are the differences between the two costing methods, and how do these apply to your company?
- What are some ABC cost drivers the company might use?
- How could the costs differ if one method is chosen over the other?
- Which method would you recommend for your company, and why?
Reply to 2 Peer posts
PEER POST 1
The product costs consists of direct materials, direct labor, and factory overhead. The two costing methods are single plantwide factory overhead and multiple production department factory overhead. Single plantwide factory overhead is a method that consists of allocating all factory overhead using a single rate. Multiple production department factory overhead method consists of using a different rate for each production department to allocate the factory overhead costs to the product(s). Activity-based costing method is an alternative method to allocate factory overhead, that method uses multiple factory overhead rates that is based on each different activity. The costs could differ between the two because one has a more extensive approach than the other methods. ABC is a more extensive method as it is based on each activity, unlike the other two costing methods that focus on each department or using a single rate for all of the factory overhead. I would recommend using the ABC method because while it is extensive it is easier to track since it is based on each activity and not each department which could be harder to track down if a mistake were to happen. I use to work in a small bakery so I would assume that multiple production department factory overhead method was used.
PEER POST 2
From the reading there were a few different things that I picked up on the different costing methods and I will use those to apply them to a company that I used to work for. When I am thinking about the differences between process/product costing and activity-based costing, I am looking at how much direct labor is used to get the job done. For process/product, I am looking at the steps that must be done to complete the product and what the final product turns out to be. For activity-based, I am look more at the direct labor hours used to make, inspect and run the company. So the company I am looking into makes snack sticks with sesame seeds and other materials. It is a fairly low scale business, and is ran by a couple who hires the people needed to do the jobs in the factory. The main cost driver for this company would be the materials used to make the product, the equipment used to make and pack the product, and the workers that make all of this happen. The costs could differ for this company because there is a lot of work done by machines moving the product from being made, through the fryers, into the hopper/drier, moved to plastic packaging, and boxed, and in this there is not much looked at from the workers perspective. But when you look at the direct labor, every week they tear some machines apart for cleaning, someone moves the raw materials around and someone packages the materials for shipping. So there could be a very large cost difference if something was not accounted for. I would recommend the process/product costing because of all the other factors that go into making the goods.