Question

Explain the difference between traditional and ABC cost systems

Answer 1

In Traditional costing, all overhead costs are grouped together and then absorbed into product costs on the basis of Labour cost/direct labour hour/machine hour,etc.

However, Activity Based Costing assigns the cost to activities rater then product or services. It enables overhead costs to be more accurately assigned to different product and services.

ABC system allocate cost to different products on the basis of different cost drivers and not on overall overhead cost basis.

ABC system is much usable for the organisations with multiple products and services and high amount of overhead cost.