Question

What are the key reasons for product cost differences between simple costing systems and ABC systems?

Answer 1

Simple costing approaches generally either have one or a few indirect costs as the allocation base, irrespective of the heterogeneity in the facility. On contrary the aactivity-based costing approach have multiple indirect cost pools.

The simple costing system would does not use cost pools as the allocation base for indirect costs; however ABC approach attempts to use cost drivers as the allocation base for indirect cost pools.

A simple costing system has more indirect costs while ABC system classifies as many indirect costs as possible as direct costs.