by Activity based costing
Activity based costing is a method of cost allocation of overhead costs such that, for each different activity, a different cost driver is applied which is best suited for that activity. The cost driver is specifically selected for each activity.
The activity-based costing method also solves the problem of erroneousness that comes in a traditional approach. It helps to distinguish between profits that are profitable or profits that are not profitable.
ABC is the most accurate and difficult to implement that’s why it is best suited for a company or firm with high overhead costs compared to a small company that offers services. Companies that manufacture a large number of products with different varieties prefer ABC because it gives exact data of the costs of every product.
Traditional Costing:
Traditional costing is a costing method used to allocate overhead costs based on a single cost driver according to the consumption of a volume of production resources. This single cost driver can be based on machine hours, labor hours etc. and is used for all the different activities.
Traditional costing is beneficial when the overhead of the business or firm is not so much compared to the direct cost of production. Trading Costing generally gives exact costs figures when the product is very good in amount and change in overhead rate does not create major change while measuring the cost of production.
It is not expensive as activity-based costing to implement. It is used usually for external exports because it is easier and more understandable for outsiders. Traditional costing is good methods for those manufacturers who produce only make few different goods.
| Activity Based Costing | Traditional Costing | |
| Definition | This is used for finding the indirect costs. | This method is for finding the cost for the products in advance. |
| Advantages | It gives the profit of the product accurately. | Workers will be more productive to do the work. |
| Disadvantages | The benefits will be limited. | It is not helpful when we determine the overhead costs for general purposes. |
| Activity Types | Unit level and Facility level. | Unit level, facility level, product level, and batch level. |
| Costing Method | Less expensive costing method. | More expensive costing method |
