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  • Posted By: logan_MBA
  • Date Posted: 12/04/2010
  • Category: Business
  • Words: 2452
  • Pages: 10
  • Views: 1214
  • Rank: 69

ABC vs. Traditional Costing Methods

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ABC vs. Traditional Costing Methods

I. Introduction

Multiple objectives are pursued in this paper. The first objective is to discuss and compare traditional cost accounting methods and activity-based costing methods. The second objective is to determine the extent to which activity-based costing methods are used in the United Arab Emirates (UAE). The third objective is to determine why some organizations in the UAE continue to use traditional cost accounting methods. The fourth objective is to develop a recommended strategy to increase the use of activity-based costing in the UAE.


II. Traditional Methods of Costing

The traditional costing model includes six elements. These elements are as follows (Garrison, Noreen, & Brewer, 2007):



For product-costing purposes, a company is separated into functional areas of activity - manufacturing, marketing, financing, and administration


Manufacturing costs of direct materials, direct labor, and manufacturing overhead are subject to inventory costs


Direct materiel and direct labor costs are considered to be traceable directly to specific products


Manufacturing overhead costs are treated as indirect product costs, and they are charged to specific products at predetermined overhead rates


When a single, company-wide, predetermined overhead rate is used, overhead is charged to all products with no consideration for differences in resource use


The functional costs of marketing, financing, and administration are accumulated in cost pools, and they are applied in the period in which they are incurred; these costs are not treated as product costs nor are they related to specific products in product profitability comparisons

Full costing (absorption costing or activity-based costing) considers all costs to be product costs. Thus, all overhead costs are allocated to costs of production for specific products. Traditional costing, by contrast, includes only the costs for those factors that change with the production of an additional ...

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