Activity based costing versus traditional costing
Following are the main differences between activity based costing system and traditional costing system:
Explain
1) Under ABC system overhead costs are identified to each major activity in stead of the department as under traditional costing system. It results in greater number of cost centers under ABC system.
2) The term cost driver is not used under traditional costing system. Popular terms are basis of allocation or apportionment. Under ABC system cost delivers are fewer in number for the purpose of charging overheads to products.
3) ABC system uses separate rates for support centers and there is no reallocation to production centres as is the case under traditional costing system.
Thus traditional costing system reveals less accurate cost as compared to ABC system. This is primarily because cruise and effect relationship is considered under ABC system to identity support cost objects which is not the case under traditional costing system.