Activity Based Costing In Merchandising Industry

Activity based costing in merchandising industry.

Theme index and organization.

1- What is the merchandising industry?
2- Why costing is important in a business?
3- Activity based costing and traditional costing.
4- Activity based costing pros and activity based costing contras
5- Traditional costing pros and traditional costing contras.
6- Activity based costing(abc) vs traditional costing table and numerical example.
7- Differences of costing between merchandising companies and manufacturers.
8- Conclusion.

1-What is the merchandising industry?

The merchandising industry is the term used to define the commercial activity that has it’s revenue based on selling products to retail customers. The merchandising industry is also called retailing,and the merchandisers are also called retailers.
The way that this industry works is buying products from wholesalers and manufacturers, adding a markup or gross profit and selling the same products to customers making the profit in this higher added pricing.
An example of a retailing business is a supermarket.

2-Why costing is vital for the companies?

For companies costing systems are thetools that helps them determine the cost of a product related to the revenue that generates. It is also the way to measure and understand the behavior of the costs when the conditions of the business or the volume of goods change. On the other hand in order to improve a process is necessary to be able to measure. “If you can measure, you can improve it!”
This process is necessary to ensure thatthe company survives and that the activity produces revenues.

3- Activity based costing and traditional costing.

In this report, two methods of costing will be analyzed and compared. The two methods are the Activity Based Costing also called ABC method, and the Traditional Costing method.
The decision of analyzing this two systems is because they reflect the standards of cost accountingbeing the most commonly used in the different industries over the years.

The traditional costing was the most common used before the Activity Based Costing. This is a system that does not divide the costs by the functions or allocations that are part of the process, instead relies on the arbitrary allocation of indirect costs. The overhead rate used in the traditional costing system wouldnormally be calculated using units, labor hours or machine hours.

The Activity Based Costing or (ABC) is one of the most widely used and accepted costing systems nowadays. This system assigns costs to products or services based on the resources that they use. As it was written in an article of The Economist “ABC changes the way in which costs are counted”

4- Traditional costing advantages andactivity based costing inconvenients.

The advantages of the traditional costing system are the simplicity , because the calculation of the overhead rates is relatively straightforward; how easy to understand they are in the business and that they are not expensive to operate. For the companies that manufacture only one product can be accurate.
On the other hand traditional costing system has manydisadvantages.
They rely on arbitrary allocation of costs rather that cause-effect allocation cost of overheads. For the companies that have a vast range of products or services this method does not provide with accurate product costs and usually tend to fail when analyzing the non manufacturing costs.

5- Activity Based Costing advantages and disadvantages.

The accuracy of the ABC is oneof the mayor benefits of this system. Within a company you can assign the costs only to the products that had required them, avoiding allocating cost to the products that did not required them.
At the same time provides a greater understanding of the costs allowing you to improve in the areas that is needed.

The disadvantages of this system are the substantial amount of resources that are...