A Comparative Analysis of Activity-Based Costing and Traditional Costing Systems: The Case of Egyptian Metal Industries Company

A Comparative Analysis of Activity-Based Costing and Traditional Costing Systems: The Case of Egyptian Metal Industries Company

Department

El Khazendar Business Research and Case Center

Abstract

Today, organizational environments are increasingly characterized by an expanding use of advanced technologies. A company’s management accounting system should capture the underlying technology, be consistent with corporate commitment to total quality and increased automation, and promote its efforts to compete on the basis of cost, quality, and lead time. However, the recent literature reveals that traditional cost accounting systems systematically introduce serious product cost distortions, which lead to inappropriate strategic decisions. Activity-Based Costing (ABC) represents an alternative paradigm that is giving more accurate and traceable cost information. The objective of this case is to illustrate the application of ABC method in a single manufacturing organization operating in the metal industry and to compare the results of ABC with volume based costing (traditional costing) method. The results of the application highlight the weak points of volume based costing which assigns factory overhead costs using direct labor-hours or machine-hours as a cost driver. As a result, volume-based costing under-costs low-volume product (i.e. products requiring fewer direct labor hours in total), while it over-costs high-volume products (i.e. products requiring more direct labor-hours in total), and thus, a product is subsidized at the expense of others. In cost accounting this is called cross-subsidization. However, activity-based costing traces overhead consumption by each product and thus provides a more accurate per-unit overhead cost.

Publication Date

2011

Document Type

Book Chapter

Book Title

Cases on Business and Management in the MENA Region: New Trends and Opportunities

ISBN

ISBN139781609605834

Publisher

IGI Global

City

Cairo, Egypt

First Page

41

Last Page

53

Keywords

Comparative Analysis, Activity-Based Costing, Traditional Costing Systems, Egyptian Metal Industries Company, Egypt

A Comparative Analysis of Activity-Based Costing and Traditional Costing Systems: The Case of Egyptian Metal Industries Company
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