What is the difference between traditional based costing and activity based costing?

Answer 1

Traditional based costing systems typically use a single overhead pool - that is a single accumulation of costs that are not directly identifiable as product part costs or as labor. This would include supply and maintenance expenses, allocations of management salaries, depreciation, etc.

Activity based costing utilizes a lot of smaller more targeted cost buildups that are accumulated based on "activities". For instance, if purchase orders are only required from some vendors, then the cost of p.o. preparation and mailing is included in a small overhead pool that is only allocated to the products that use those parts. If a machine setup process is only needed for the processing of certain parts, then the cost of the setup is included in the pool for only those parts, etc.

Some advantages for the (ABC).

1. It facilitates delegation of decision making.

2.It helps management promote the concept of management by objective in which managers agree on a set of goals.

3. It provides a guide to the evaluation of performance and helps to establish standard of performance, which are then used for comparison purpose.

4. It permits effective use of the concept of management by exception which means that the manager's attention is concentrated on the important deviations.