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 are the main problems associated with traditional costing?

How does traditional costing assume overhead costs are related to production volume?

What is the impact of using traditional costing on high volume and low volume products?

Explain how ABC costing addresses the issues found in traditional costing.

What discrepancies were found between the costs calculated using traditional costing and ABC costing?