Difference between ABC and traditional costing
ABC Vs traditional costing:
While costs that occur during a production process is of various natrure, it is important that one has methods of costing which helps in determining and categorizing the costs. The ABC costing and traditional costing method are two such ways in which the process can be conducted in an effective manner.
What is ABC costing?
Activity based costing, which is commonly referred to as ABC, is a method of costing that is base don activity. This approach identifies individual activities as fundamental cost objects and is then serves as a basis which aids in assigning costs to the other cost objects. Therefore, after assigning a cost to each individual activity, the cost is then reallocated to individual products or services again. For example, if purchase orders are only required from some vendors, then that particular cost is only allocate to the products that utilize those parts.
What is traditional costing?
In the traditional costing approach, all costs are directed towards a single accumulation of costs which cannot be directly identified as a part of a product. This is based on common allocation of costs such as labor, maintenance, salaries, depreciation, etc.
What is the difference between traditional costing and ABC?
The traditional costing approach is considered as the older approach of the two as it is said to have been introduced between the years of 1870 to 1920 whereas the Activity based approach was introduced more recently in the 1981. The main difference between these two approaches is that whereas in traditional costing, the cost depends on the cost objects and the used up resources which were utilized in the production process whereas in ABC costing, the cost depends upon the activities that have been used up by these cost objects.
While the ABC approach is considered as more accurate and much more preferred than than traditional costing method, the traditional costing is said to be unable to calculate the true cost of products. This is because of the fact that traditional costing uses a single overhead pool which accumulated arbitrary expenses such as salary, expenses, etc, while the ABC method of cost assigning is considered as more accurate.
Also, ABC is known to be used in smaller targeted activity based costs while it is also considered as being helpful in the decision making and clarification of the management concepts because of the fact that the cost of a product in the ABC system is determined according to customer feedback and pocket range. Yet, the traditional costing method determines the cost of production only after the production process and therefore does not serve such a purpose.