Traditional vs. Activity-Based Costing in Decision Making
Order Instructions
Activity-based costing (ABC) is a costing method that is designed to provide managers with detailed cost information. In this method, an activity is any event that causes the consumption of overhead resources. An activity cost pool is a “bucket” in which costs are accumulated that relate to a single activity measure in the ABC system. An activity measure, or cost driver, is the activity that “drives” the cost being allocated. For example, using ABC, the delivery costs for a pizza parlor are driven by the number of orders, rather than the number of actual pizzas produced. In a traditional costing system, the allocation bases are driven only by the volume of production.
Jean Simmons, a licensed Counsellor, provides teen counseling and executive coaching services to her clients. Jean charges a $300 fee per hour for each service. Jean uses the traditional labor-based method of allocating costs.
The revenues and costs for the year are shown in the following income statement that has been prepared using direct labor-hours as the only allocation base (220 hours for teen counseling; 450 hours for executive coaching).
In your original post, answer the following:
How might Jean’s decisions regarding pricing or dropping a service be altered if she were to allocate all overhead costs using activity-based costing?
A local nonprofit charity is looking for worthy causes to support through financial grants. A primary criterion for support is financial need. Jean is thinking of applying for support for the teen counseling program. Which allocation method would give her the best chance of winning a grant? Are there any ethical implications regarding her choice?
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