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Compare and contrast activity-based costing with traditional system using a single application base for conversion cost.

Compare and contrast activity-based costing with traditional system using a single application base for conversion cost.
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The manufacturing cost of a product consists of direct material, direct labor and manufacturing overhead. The direct material and labor are directly traceable to the cost object. Manufacturing overhead is allocated to cost objects based on an appropriate basis.

In a traditional system, a predetermined overhead rate is determined by dividing the overhead by a single allocation basis. The single allocation base could be direct labor cost, direct labor hours or machine hours. It is a very simple method of costing.

Activity based costing is refined and accurate. Cost drivers are identified to assign costs. An overhead rate is calculated separately for each activity. It helps in identifying the value adding and non-value adding activities.

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