Milestone 3 Acc 550

Alterative Costing Method

Milestone Three

Southern New Hampshire University

Milestone Three

        The Hampshire company currently uses the traditional method of costing, which is basically how the company allocates their manufacturing overhead costs to the products or good and services produced.  Under this method, an assignment or allocation of the production will be based upon the volume of products; such as machine hours, direct labor hours, or direct materials. This is an effective method to cost the indirect costs on a simple basis, since this will allocate equally across all production. The company should continue to improve products and efficiency, so possible alternatives will be need to be examined. Hampshire company could benefit for utilizing a more complex and detailed costing system, such as Activity Based Costing, ABC, system to allocate their costs, since there are multiple cost drivers. Cost drivers to be considered could include production costs, setup costs, and labor hours. So under this method, the company will use the multiple cost drivers to allocate the manufacturing overhead, the indirect costs. With the use of ABC, the company will be able to better cost their products on specific cost drivers in order to better understand the process of making a particular product. This will allow for Hampshire to better determine whether or not to take on a potential request from a customer, such as the request from Tours Today and the collapsible umbrellas.

        The ABC system could be beneficial for certain types of companies, while being non-beneficial for others.  Such as manufacturing companies benefiting from the system if they make a variety of products which differ, since there may be different requirements. If company tends to only make a product line which is very similar in production the ABC system may not be beneficial. The traditional costing method is more simplistic due to the nature of allocation indirect costs using one cost driver and are usually found best suited for manufacturing companies with lines of similar production.