Several Dysfunctional Decisions That Could Be Made Using Traditional Cost Allocation

Subject: Accounting
Pages: 2
Words: 277
Reading time:
< 1 min

In case Steinway Piano is not implementing the activity-based costing in their organization, it will result in persisting with the value-less activities in their production process. The actual cost of each of the processes cannot be identified and assessed separately, and thus total cost control cannot be implemented in the organization. The employees will not be made aware of their role in the cost control of the organization. “ABC is a costing model that identifies the cost pools or activity centers in an organization and assigns costs to products and services (cost drivers) based on the number of events or transactions involved in the process of providing a product or service.” (Activity Based Costing Method ABC Methodology).

The application of traditional costing techniques will lead to several dysfunctional decisions in the organizations related to cost control and quality control. Proper identification of cost drivers and cost centers is not possible without activity-based costing. And thus, the cost control measures cannot be employed in the organization. The process cost involved at each step of the manufacturing process has to be identified by the organization for ensuring adequate cost control in each of the processes. Thus without activity-based costing, process-based cost control is not possible for the organization. It is better for Steinway Piano to adopt activity-based costing in their organization to ensure the production process with cost control and standardization. It can be concluded that activity-based costing is better suited to the Steinway Piano for ensuring the process cost control in the organization by identifying the cost centers and cost drivers in each of the processes involved in the piano creation.