ABSORPTION COSTING AND ACTIVITY-BASED COSTING METHODS IN MANUFACTURING AND SERVICE SECTORS

Аннотация

This thesis is about cost management systems which play a crucial role in organizations by providing a structured approach to monitor, control, and optimize costs. These systems are researched to track and analyze expenses across various departments and activities, enabling businesses to make informed decisions and improve their financial performance. From a strategic perspective, cost management systems help organizations identify cost drivers, understand cost behavior, and allocate resources effectively. They also facilitate budgeting and forecasting processes, allowing businesses to set realistic financial targets and monitor their progress. When it comes to the importance of cost management systems, different stakeholders have varying perspectives. From the perspective of top management, these systems provide valuable insights into cost structures and help identify areas of inefficiency or waste. This enables management to take proactive measures to reduce costs, enhance profitability, and gain a competitive edge in the market. For finance departments, cost management systems streamline financial reporting and enable accurate cost allocation, ensuring compliance with accounting standards and regulations. Key words. Accountants, traditional costing, indirect costs, cost driver, cost estimates, activity-based costing, cost behavior, business operations. Introduction. Traditional costing is a method of cost allocation popular in the business for many decades. It originated in the early 20th century and was developed by accountans who were looking to allocate indirect costs to products and services in a systematic way. The method involves allocating indirect costs, like overhead, to products based on a predetermined cost driver, such as direct labor or machine hours. The cost driver choice depends on the assumption that the cost of producing a product or providing a service is directly proportional to the volume of resources available. While the traditional costing method is already popular in business, its limitations have become more apparent in the modern business environment. One of the main limitations is that it needs to consider the complexity of contemporary production processes. And the diverse range of activities involved in producing goods and services. This can lead to inaccuracies in cost estimates, particularly for products that consume different levels of resources. Many companies use complex costing methods like activity-based costing (ABC). This provides a more comprehensive and accurate view of cost behaviour. And thus is better suitable for modern businessoperations complex and diverse nature. Materials and methods. Absorption costing is based on the principle that production overheads are driven by the level of production. This the because the activity level in the OAR calculation can be units, labour hours or machine hours. These all increase as the level of production increases. This was true in the past, because businesses only produced one singleproduct orafew single and similarproducts. page978 INTERNATIONAL JOURNAL OF ARTIFICIAL INTELLIGENCE ISSN:2692-5206,ImpactFactor:12,23 AmericanAcademicpublishers,volume05,issue05,2025 Journal: https://www.academicpublishers.org/journals/index.php/ijai Graph 1. Using overheads systems in tradidional manufacturing and modern manufacturing The nature of manufacturing has changed. Many companies must now operate in highly competitive environment and, as a result, the diversity and complexity of products has increased. Traditional systems measure accurately volume-related recources that are consumed in proportion to the number of unitsproduced ofthe individual products. Such resources include direct materials, direct labour, energy, and machine-related costs. However, many organizational recources exist for activities that are unrelated to physical volume. Non- volume related activities consist of support activities such as, materials handling, material procurement, set-ups, production scheduling and first item inspection activities. Traditional product-cost systems, which assume that products consume all activities in proportion to their production volumes, thusreport distorted product costs. Activity-based costing establishes separate cost pools for support activities such as material handling. As the costs of these activities are assigned directly to products through cost driver rates, reapportionment of service department costs is avoided. The use of cost drivers is the main idea behind ABC as they highlight what causes costs to increase – for example, the number of orders to suppliers each product incurs. Overheads that do not vary with volume/output, but with some other activity, should be traced to products using ABC cost drivers. Traditional costing, on the other hand, allows overheads to be related to products in morearbitrary ways- therefore producing less accurate product costs Table1. Calculatingthefull productioncost perunitusing ABC(t