Discussion – Advantages and Disadvantages of Using Standard Costing Method and ABC Model

Discussion – Advantages and Disadvantages of Using Standard Costing Method and ABC Model

Using a conventional costing approach has many advantages for a company. The standard costing method can be easily implemented due to its simplicity. According to Kanaan-Jebna et al. (2022), this method is straightforward since it allocates overhead expenses to products based on a single cost driver, such as direct labor hours or machine hours. On top of that, it offers consistent price projections, which is useful in sectors with little product variation and modest production volume swings (Walker et al., 2020). On the other hand, when multiple products or services are produced, and the overhead allocation is based on a single cost driver that may not accurately reflect the resource consumption, the method may lead to cost inaccuracies.

When it comes to product pricing, the ABC model is superior because it enables more exact cost allocation by taking into account several cost drivers that directly connect to the use of resources. Under the ABC approach, organizations can also optimize their product mix, make more informed pricing decisions, and find ways to cut costs (Brewer et al., 2019). However, putting ABC into practice may be time-consuming and labor-intensive because it necessitates the identification of several activities and cost drivers, as well as constant data collecting and analysis. If I ran a small manufacturing company, I’d apply the ABC approach to get more precise cost estimates. This is because ABC is superior to other methods in allocating expenditures and revealing hidden expenses (Hiton & Platt, 2020). Overall, ABC is a beneficial alternative for a small manufacturing organization with high volume and various product lines despite being more complex and costly to adopt due to the benefits of enhanced cost accuracy, pricing optimization, and resource efficiency. It allows for more informed decision-making and has the potential to boost profits over time.

References

Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2019). Introduction to managerial accounting. McGraw-Hill.

Hilton, R. W., & Platt, D. E. (2020). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill.

Kanaan-Jebna, A., Baharudi, A. S., & Alabdullah, T. T. Y. (2022). Entrepreneurial Orientation, Market Orientation, Managerial Accounting, and Manufacturing SMEs Satisfaction. Journal of Accounting Science, 6(1), 1-14.

Walker, E. R., Zhang, Y., Hora, B. A., & Sanders, P. R. (2020). The State of Cost and Managerial Accounting Education: Management’s Perspective. Journal of Higher Education Theory & Practice, 20(5).

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What benefits and drawbacks are there for a business that uses a Standard/Traditional Costing model?
What benefits and drawbacks are there for a business that uses an Activity Based Costing (ABC) model?
If you owned a small manufacturing business with a relatively high volume and multiple product lines, would you implement an ABC model? Why?
As you get ready to reflect on these questions, don’t forget that the best answers are attempts to apply the concept to a small business and explore how a standard/traditional costing or activity-based costing system would/could be used. What are the benefits and the risks – or how could you adapt it to get the best of both?
Don’t forget that, when you draw a blank on a question (or any part of it), take a quick look at the concept on the internet or in the Post Online Library. There will be some great inspiration there that will help you out AND lend some different perspective on the matter! (Don’t forget to cite anything that you use!)