Product Costing: A Comparison of Conventional and Activity-based Costing Methods

Abstract

Product costs are calculated by many different departments in a company: cost engineering, industrial engineering, design, manufacturing, etc. The aims of these groups, the methods used by them and the uses to which their results are put are different. Cost engineering provides cost estimates based on finished designs. Industrial/manufacturing engineering groups calculate costs with a high emphasis on processing costs. Management uses these figures for making decisions on quantities and the product mix to be produced. Designers use (or should use) models to predict costs at the various design stages. These results help in making decisions during designing—where they are most effective. Most of the cost tools today address the problem only in the final design stages, whereas the major portion of the product cost is set much earlier. Generally, however, the designer often does not have sufficient knowledge of the manufacturing processes and the costs incurred therein. Design decisions influence all of the subsequent costs of the product. In the traditional organization, design and production planning are carried out sequentially and independently. The costs are calculated after the fact, when it is too late to have significant impact on them. The paper describes types of cost structures and costing methods. A comparison of conventional and activity-based costing is made with the help of an example. The latter has proven itself to be a fairer method of allocating overhead costs when a mix of products is involved.