Reasons to Use Traditional Costing

The video discusses the limitations of traditional costing methods, which often assume that all manufacturing overhead is proportional to production volume. This can lead to overcosting high-volume products and undercosting low-volume ones. Activity-Based Costing (ABC) is introduced as a more accurate alternative, using specific cost drivers to allocate costs more precisely. An example illustrates the discrepancies between the two methods, highlighting the potential for mispricing products. The video concludes that while traditional costing is simpler, ABC provides more detailed and accurate cost information.

What is a major drawback of traditional costing methods?

• They are too complex to implement.

• They assume all overhead costs are proportional to production volume.

• They require too much data to be effective.

• They are only applicable to service industries.

How does Activity-Based Costing (ABC) improve cost accuracy?

• By using a single cost driver for all activities.

• By ignoring overhead costs.

• By focusing only on direct labor costs.

• By using batch-level or product-level cost drivers.

In the example provided, how did the traditional method affect the cost of the small volume product?

• It under-costed the product.

• It had no effect on the product cost.

• It over-costed the product.

• It accurately costed the product.

What is a potential consequence of over-applying manufacturing overhead using traditional costing?

• Improved product quality.

• Increased product demand.

• Underpricing the product.

• Overpricing the product.

Why might a company choose to use ABC over traditional costing?

• ABC provides more accurate cost information.

• ABC is simpler to implement.

• ABC is only suitable for large companies.

• ABC requires less data collection.