Difference Between Traditional and Activity Based Costing

In: Business and Management

Submitted By Smaharaj
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How Activity Based Costing differs from Conventional Costing
Costing is used in business as a way of determining the cost of manufacturing/offering a product/service. Costing systems determine the overhead (indirect) cost of production and then allocate those overhead costs to a business’ products or services offered.
There are two common methods for allocating these indirect costs to products. Activity Based Costing (sometimes referred to as “ABC” Costing) and Traditional Costing. Both these methods assess overhead costs and then attach these costs to products based on certain cost drivers. A cost driver is any component that costs money or any factor that is related to a cost occurring, such as the volume produced or the number of labor hours.
Without going into the hard hitting mechanics of how ABS and/or Standard Costing works, this assignment will cover the key differences on how each costing system differs.

Time is money
Activity-based costing is more accurate with increased benefits because it takes important factors into account before assigning a cost to a product. However, for this same reason, it is a bit more complicated and time-consuming. It's also more thorough and considers nonmanufacturing expenses as well, such as administrative and managerial costs. source :cfo.com
Traditional costing is a much easier way of determining the cost of a product, since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate, because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs actually affect specific products.
EXAMPLE: A simple example of these costing methods can be demonstrated with the costs of living in an apartment with roommates. Two roommates in an apartment will typically split the costs of rent, utilities and groceries, and they have a couple of options…...

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