On the other hand, activity-based costing apportions the costs incurred during manufacturing of a particular product or service based on the activities required during their production. It is crucial for managers to comprehend the merits and demerits of the two systems to satisfy the needs of their business operations.
The budget presented entails schedules that raise various concerns leading to the recommendation that the company should switch to the activity-based costing system of accounting. The first concern is the quarterly budget that in my opinion requires further subdivision to generate quarters. Mainly, cycling takes place in temperate weather conditions. Buying materials for bicycle production for the start of sales hikes demand therefore, requires the producer to incur a quarter before the demand. Another concern regards accounts that remain uncollectable. The master budget for the company is not specific it its cash budget line. It closely refers to the uncollectable receivables. Variable factors in this context emanate from economic features among them limited sponsorship and carry the capacity to result in wrong accounts. From the budget, the company is setting aside a budget for 140 bikes inclusive of labour costs. It is appropriate to cut down on the level of production of extra parts in the inventory.
The method of distributing manufacturing overhead by activity-based costing (ABC) to products is efficient compared to the traditional method of costing. Precisely, activity-based costing assigns the right percentage of resources to particular products. While monitoring and allocating organizational costs to products and objects, activity-based costing remains a more sophisticated and logical method as opposed to the traditional costing system.