Activity Based Costing VS Standard Costi

Activity Based Costing VS Standard Costing for NR Pet Products : 

Activity Based Costing VS Standard Costing for NR Pet Products Group Six Dustin Pesch Taylor Shamblin Melissa Dutton

NR Pet Products Overview : 

NR Pet Products Overview Newly Recycled Pet Products It is a small local business which uses reclaimed recycled material from CSU Chico Materials are used to construct dog houses and dog bones Management needs to know whether an Activity Based Costing System or Standard Costing System is more efficient for the small business.

ABC Costing Overview : 

ABC Costing Overview Is used for internal decision making and for managing activities Products are assigned all of the overhead costs Defines five levels of activity. First assigns costs to the activities that are the real cause of the overhead, then it assigns the cost of those activities only to the products that are actually demanding the activities Products are only charged for the costs of the capacity they use, not for the costs of capacity they don’t use

Pros of ABC Costing : 

Pros of ABC Costing Activity Based Costing has become increasingly important due to Increase in manufacturing overhead costs There is no longer a correlation between manufacturing overhead costs and productive machine hours/ direct labor hours. Growth in diversity of products and the diversity of customer demand some products are produced in large batches, while others are produced in small batches

Pros of ABC Costing cont. : 

Pros of ABC Costing cont. Activity-Based Costing system assigns the non-manufacturing overhead costs caused by products to those products on a cause-and-effect basis ABC provides better financial statements for managerial decisions

Cons of ABC : 

Cons of ABC Activity Based Costing is expensive to maintain Activity-Based Costing does not conform to GAAP May provide too much detail, obscuring the bigger picture Barriers to Change- difficult to set up and establish after more traditional methods have been used

Standard Costing Overview : 

Standard Costing Overview Is used for preparing external financial reports Only manufacturing costs are assigned to products, no “non-manufacturing” All manufacturing costs are assigned to products-even manufacturing costs that are not caused by the products The costs of unused, or idle, capacity are assigned to products From the European Journal of Operational Research, accountants believed the most effective standards were those set by industrial engineers with the participation of operating managers to be evaluated

Pros of Standard Costing : 

Pros of Standard Costing Is usually associated with a manufacturing company’s costs of direct material, direct labor, and manufacturing overhead This then causes variances, which is the difference between actual costs and standard costs With these new variances it can benefit management tools, if a variance occurs management becomes aware that manufacturing costs are different than the standard costs If actual costs are greater than standard costs, the variance is unfavorable, therefore it says if everything stays constant the company’s actual profit will be less than the planned profit If actual costs are less than standard costs, the variance is favorable, therefore it says if everything stays constant the company’s actual profit will likely exceed the planned profit

Pros of Standard Costing cont… : 

Pros of Standard Costing cont… Standard costing is less costly to maintain than Activity-Based Costing Simple, consistent, and well understood by auditors when referring to the financial statements Manufacturing industries adopt standard costing for cost control

Cons of Standard Costing : 

Cons of Standard Costing Standard Costing financial statements are misleading and meaningless as a tool to assist in making effective management decisions Using Standard cost basis for calculation of prices needs tempering by consideration of what customers want and are prepared to pay if maximum profit is to me achieved Standard Costing system treats fixed costs on a percentage basis, so if fixed costs are down the selling price and profit per unit will also decrease. It is a simple way of calculating price but and inferior way of setting prices. It assumes the costs are the thing whch cause people to buy

Costing System Chosen for NR Pet Products : 

Costing System Chosen for NR Pet Products Activity Based Costing was found to be more efficient when applied to NR Pet Products. Since NR Pet Products is a new small business the cost and difficulty of implementing ABC wont be as expensive ABC would allow management to make better financial decisions for the company since it accurately represents the costs to the company instead of estimating them. Activity Based Costing is better for a company with a diverse set of products

References : 

References www.accountingcoach.com   www.theacagroup.com.  http://www.en.articlesgratuits.com/standard-cost-pricing-id1571.php http://www.managers-net.com/activityBS.html Common cents: how to succeed with activity-based costing and activity-based management. Kahn, S. R.. Choice: Current Reviews for Academic Libraries, Oct2006, Vol. 44 Issue 2, p340-341, 2p; (AN 22562164)Database: Library, Information Science & Technology Abstracts