A. Introduction
Business recently is in uncertain and competitive condition,
neither in large or small scale of industries. Every company seems to apply its
strategies to win the competition in the market. Therefore, reliable
information about cost is very important for decision making. Companies that
can effectively gather and spread relevant information to all their departments
might be successful to be great companies in the world (Compton, 2009). One
thing that should be considered is about efficiency. In order to know how to
improve efficiency, companies need to know information related to the costing
method implemented to production activities, so they can identify each cost
appropriately.
Costs can be divided into direct costs and
indirect costs or overheads. Direct costs are easier to be assigned to cost
objects than indirect costs because direct costs can easily be traced to
particular cost objects, while indirect costs cannot. Assigning process of
indirect costs involves cost allocation of resources that are consumed in
company activities. There are two costing system that can be applied, direct
costing system, which only assigns direct costs to cost objects, and absorption
costing system, which assigns direct and indirect costs to cost objects.
Absorption costing system can be divided into Traditional Costing Systems and
Activity Based Costing (ABC) System (Drury, 2013).
