Difference Between Tradtional Costing and ABC

[dilgiles49]

Can anyone tell me the difference between traditonal costing and ABC? Also the advantages and disadvantages with using ABC over traditonal costing?:o

[Sonal]

as per my knowledge:

1. Traditional cost accounting is structure-oriented and ABC is process-oriented.

2. Traditional cost accounting mostly utilises volume related allocation bases whereas ABC uses cost drivers at different levels.

3. In traditional cost accounting it is assumed that resources are consumed by cost objects while in ABC it is assumed that activities are consumed by cost objects.


hope this helps you

[Vitz]

Hi dilgiles, how're you doing? :)

In traditional costing overheads are absorbed on a production volume basis whereas in ABC aaproach overheads are absorbed on the basis of *'activities' that *drive costs.

ABC approach assumes:

1- A large proportion of total costs are overhead costs and direct labour costs are realtively small.

2- Direct labour cost is a small element of cost so it's not right to absorb overheads at a rate per direct labour hr.

Overheads costs are large and it's appropriate to trace these costs as accurately as possible to the products that create the cost.


ACTIVITIES: An operation that takes place within an organisation and causes costs to be incurred. Example: receipt of raw materials, production planning, machine set-up etc.

COST DRIVERS: Factor that influence the level of cost.

COST POOLS: An activity for which overheads costs are identified and allocated. For each cost pool there should be a cost driver.


As far as the advantages and disadvantages are concerned you can go through the F5 posts, posted by Nalinee I think, but for your convenience I'll paste them here.

Benefits:

-Better profitability measure
-Better decision making
-Provide information to identify areas where process improvement is needed
-Lead to better cost estimation

Limitations:

-Very expensive to install and consuming
-Not include all costs associated with the products
-Some costs require allocations to departments and products based on arbitary volume measures


Hope it helped a bit :)