Question

1. What is the difference between traditional cost allocation and activity-based costing (ABC) systems?
2. Explain how ABC systems facilitate better planning and control.

Answer 1

Answer :

Difference between traditional cost allocation and activity-based costing (ABC) systems is as follows :

	Activity-Based Costing (ABC) systems	Traditional Cost Allocation
Primary Focus	Use multiple cost drivers for multiple activities.	Use identicle cost driver for different activities.
Scope	Cover Product cost only	Cover both Product and Period cost
Implementation	Difficult to implement	Simple and easy to implement
Reporting	Used in external Financial reporting.	Cannot be used in external Financial reporting.
Effectiveness	Enhances management knowledge to identify the opportuinity.	Does not provide any special opportuinity.

ABC systems facilitate better planning and control through various its Advantages :

• Accurate Product cost.
• Information about cost behaviour.
• Tracing of overhead costs.
• Cost Management.
• Better decision making.