Please help Companies can choose from different costing meth

Please help...

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?

Solution

What are the differences between the two costing methods, and how do these apply to your company?

In a process costing and product costing, the overheads are allocated based upon pre determined overhead basis. Ex. via total direct labor hours or machine hours used etc. Howeve, in the ABC costing, overheads are allcoated based upon the activity used by the product. In my chosen company of oil extraction (take any company you can think of like ONGC India), process costing is used as it is a process based industry where the products are not hetrogenous and activities are common.

What are some ABC cost drivers the company might use?

How could the costs differ if one method is chosen over the other?

Cost when based upon the ABC costing method can either incrrease or decrease based upon the activities used by the product. Ex., a particular products takes less of the engineering hours which cost $ 500/hour while takes more of labour hours which are of $ 100/hour where as product B takes more engeneering hours and less direct labour hours. In product costing method, the overhead rate if allocated based upon the direct labour hours than product B would be have been cheaper where as product A costly where as in reallity it would not be the case with ABC

Which method would you recommend for your company, and why?

For my chosen company (you can take any company, am taking ONGC India) process costing I would chose because it has homogneous product line and proeuction process.