{"id":3365,"date":"2020-02-16T10:25:05","date_gmt":"2020-02-16T10:25:05","guid":{"rendered":"https:\/\/commerceiets.com\/?p=3365"},"modified":"2020-02-16T10:25:05","modified_gmt":"2020-02-16T10:25:05","slug":"traditional-costing-vs-abc-costing","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/traditional-costing-vs-abc-costing\/","title":{"rendered":"DIFFERENCE BETWEEN TRADITIONAL COSTING AND ACTIVITY BASED COSTING"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/commerceiets.com\/traditional-costing-vs-abc-costing\/#Traditional_Costing_Vs_ABC_Costing\" title=\"Traditional Costing Vs ABC Costing\">Traditional Costing Vs ABC Costing<\/a><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/commerceiets.com\/traditional-costing-vs-abc-costing\/#The_difference_between_Traditional_costing_vs_ABC_costing_is_as_follows\" title=\"The difference between Traditional costing vs ABC costing is as follows:\">The difference between Traditional costing vs ABC costing is as follows:<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h1 class=\"has-text-align-center wp-block-heading\" id=\"traditional-costing-vs-abc-costing\"><span class=\"ez-toc-section\" id=\"Traditional_Costing_Vs_ABC_Costing\"><\/span>Traditional Costing Vs ABC Costing<span class=\"ez-toc-section-end\"><\/span><\/h1>\n\n\n\n<h5 class=\"wp-block-heading\" id=\"the-difference-between-traditional-costing-vs-abc-costing-is-as-follows\"><span class=\"ez-toc-section\" id=\"The_difference_between_Traditional_costing_vs_ABC_costing_is_as_follows\"><\/span>The difference between Traditional costing vs ABC costing is as follows:<span class=\"ez-toc-section-end\"><\/span><\/h5>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"260\" height=\"194\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2022\/01\/download-42.jpg\" alt=\"Traditional Costing Vs ABC Costing\" class=\"wp-image-5073\"\/><figcaption>Traditional Costing Vs ABC Costing<\/figcaption><\/figure>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>   BASIS   OF DIFFERENCE   <\/strong><\/td><td><strong>   TRADITIONAL   COSTING   <\/strong><\/td><td><strong>   ACTIVITY   BASED COSTING   <\/strong><\/td><\/tr><tr><td>   MEANING   <\/td><td>   &nbsp;   Traditional costing is the&nbsp;allocation&nbsp;of&nbsp;factory overhead&nbsp;to products based on the volume of production resources consumed.  <\/td><td>The Activity-Based Costing (ABC) is a costing system, which focuses on activities performed to produce Products. ABC is that costing in which costs are first traced to activities and then to products.   &nbsp;   <\/td><\/tr><tr><td>\n  COST\n  POOLS\n  <\/td><td>\n  Traditional\n  costing system accumulates costs into facility-wise or departmental cost\n  pools. The costs in each cost pool are heterogeneous- they are costs of many\n  major processes and generally are not caused by a single factor.\n  <\/td><td>\n  ABC\n  system accumulates costs into activity cost pools. These are designed to\n  correspond to major activities or business processes. By design, the costs in\n  each cost pool are largely caused by single factor- the cost driver.\n  <\/td><\/tr><tr><td>\n  ALLOCATION\n  BASES\n  <\/td><td>\n  Traditional\n  systems allocate costs to products using volume-based allocation bases:\n  units, direct labor input, machine hours, revenue etc.\n  <\/td><td>\n  ABC\n  system allocates costs to products, services and other cost objects from the activity\n  cost pools using allocation bases corresponding to the cost drivers of\n  activity costs.\n  <\/td><\/tr><tr><td>\n  HIERARCHY\n  OF COSTS\n  <\/td><td>\n  This\n  costing generally estimates all the costs of an organization as being driven\n  by the volume of product or service delivered.\n  <\/td><td>\n  ABC\n  allows for non- linearity of costs within the organization by explicitly\n  recognizing that some costs is not caused by the number of units produced.\n  <\/td><\/tr><tr><td>\n  COST\n  OBJECTS\n  <\/td><td>\n  Traditional\n  Costing focuses on estimating the cost of a single cost object i.e. unit of\n  product or service.\n  <\/td><td>\n  ABC\n  focuses on estimating the costs of many cost objects of interest: units,\n  batches, product lines, business processes, customers and suppliers.\n  <\/td><\/tr><tr><td>\n  DECISION\n  SUPPORT\n  <\/td><td>\n  Because\n  of the inability to align allocation bases with cost drivers, leads to the\n  problems of over casting and under casting of costs.\n  <\/td><td>\n  Because\n  of the ability to align allocation bases with cost drivers, provides more\n  accurate information to support managerial decisions.\n  <\/td><\/tr><tr><td>\n  COST\n  CONTROL\n  <\/td><td>\n  Cost\n  control is viewed as a departmental exercise rather than a cross functional\n  effort.\n  <\/td><td>\n  By\n  providing summary costs of the organizational activities, ABC allows for\n  prioritization of cost management efforts.\n  <\/td><\/tr><tr><td>\n  COSTING\n  SYSTEM\n  <\/td><td>\n  Traditional\n  costing system is relatively less expensive to implement and maintain.\n  <\/td><td>\n  ABC\n  system is expensive to implement and maintain.\n  <\/td><\/tr><tr><td>\n  SUITABILITY\n  <\/td><td>\n  Traditional\n  costing is suitable for labor intensive and low overhead companies.\n  <\/td><td>\n  Activity\n  based costing system is suitable for capital-intensive, product-diverse,\n  widely diverse set of operating activities, variation in numbers of production\n  runs, high-overhead companies.\n  <\/td><\/tr><tr><td>\n  TYPES\n  OF ACTIVITIES\n  <\/td><td>\n  Only\n  two types of activities viz. Unit Level&nbsp;\n  Activities and Facility Level Activities are identified.\n  <\/td><td>\n  All\n  levels of activities in the manufacturing cost\n  hierarchy\n  viz. Unit Level, Batch Level, Product Level\n  and\n  Facility Level are identified.\n  <\/td><\/tr><tr><td>\n  OVERHEAD\n  RATES\n  <\/td><td>\n  Overhead\n  Rates can be used to ascertain cost of\n  products\n  only.\n  <\/td><td>\n  Activity\n  Cost Driver Rates can be used to ascertain\n  cost\n  of products and also cost of other cost objects\n  such\n  as customer segments, distribution channels.\n  etc.\n  <\/td><\/tr><\/tbody><\/table><figcaption>Traditional Costing Vs ABC Costing<\/figcaption><\/figure>\n\n\n\n<p><strong>TRADITIONAL\nCOSTING<\/strong><\/p>\n\n\n\n<p>Traditional\ncosting is the&nbsp;allocation&nbsp;of&nbsp;factory overhead&nbsp;to products based on the volume of production\nresources consumed. Under this method, overhead is usually applied based on\neither the amount of&nbsp;direct labor&nbsp;hours\nconsumed or machine hours used. The trouble with traditional costing is that\nfactory overhead may be much higher than the&nbsp;basis of\nallocation, so that a small change in the volume of\nresources consumed triggers a massive change in the amount of overhead applied.\nThis is a particularly common issue in highly automated production\nenvironments, where factory overhead is quite large and direct labor is close\nto nonexistent.<\/p>\n\n\n\n<p><strong>ACTIVITY BASED COSTING<\/strong><\/p>\n\n\n\n<p>The <a href=\"https:\/\/commerceiets.com\/activity-based-costing\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Activity-Based Costing (opens in a new tab)\">Activity-Based Costing<\/a> (ABC) is a costing system, which focuses on activities performed to produce Products. ABC is that costing in which costs are first traced to activities and then to products.<\/p>\n\n\n\n<p>Activity-based costing (ABC) is\nmostly used in the manufacturing industry since it enhances the reliability of\ncost data, hence producing nearly true costs and better classifying the costs\nincurred by the company during its production process.<\/p>\n\n\n\n<p><strong>CONCLUSION<\/strong><\/p>\n\n\n\n<p>Activity-based costing&nbsp;was developed to circumvent this issue with traditional costing, using a more detailed analysis of the relationship between overhead costs and&nbsp;cost drivers. Many cost drivers may be used to create a more well-founded allocation of overhead costs.<\/p>\n\n\n\n<p>Traditional costing still works well for\u00a0financial statement\u00a0reporting, where it is simply intended to apply overhead to the number of produced units for the purpose of valuing\u00a0ending inventory. There is no consequence from a management decision-making perspective.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><td><strong>Also Study<\/strong><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/cost-accounting\/\">Cost Accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/scope-of-cost-accounting-pdf\/\">Scope of cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/elements-of-cost\/\">Elements of cost<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/types-of-cost\/\">Types of cost<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/material-control-in-cost-accounting-pdf\/\">Material control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/perpetual-inventory-system\/\">Perpetual inventory system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/pricing-of-materials\/\">Pricing of materials<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/bin-card\/\">Bin Card<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/store-ledger\/\">Stores Ledger<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/incentive-plans\/\">Incentive plans<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/overhead\/\">Overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/accounting-treatment-of-idle-time\/\">Idle time<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/system-of-wage-payment-in-cost-accounting\/\">System of wage payment in cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-time-rate-system-and-piece-rate-system\/\">Time rate vs piece rate wage system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-centre\/\">Cost Center<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/labor-turnover\/\">Labour Turnover<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Difference between management accounting and cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/allocation-and-apportionment-of-overheads\/\">Allocation and apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-allocation-and-apportionment-of-overheads\/\">Allocation vs Apportionment of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/absorption-of-overheads\/\">Absorption of overheads<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/over-absorption-and-under-absorption-of-overheads\/\">Over absorption and under absorption of overheads<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/activity-based-costing\/\">Activity based costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-traditional-costing-and-activity-based-costing\/\">Traditional costing vs ABC system<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/reconciliation-of-accounts\/\">Reconciliation of accounts<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/unit-costing\/\">Unit costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-format\/\">Cost sheet format<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-sheet-vs-production-account\/\">Cost sheet vs production sheet<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/job-costing\/\">Job costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/batch-costing\/\">Batch Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-batch-costing\/\">job costing vs batch costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/contract-costing\/\">Contract costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-job-costing-and-contract-costing\/\">Job Costing vs Contract costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/process-costing\/\">Process Costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-costing-vs-job-costing\/\">Process costing vs job costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/joint-products\/\">Joint products<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/by-products\/\">By Product&nbsp;<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/equivalent-production\/\">Equivalent production<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/marginal-costing\/\">Marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/applications-of-marginal-costing\/\">Application of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/cost-volume-profit-analysis\/\">Cost volume profit analysis<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/tools-and-techniques-of-marginal-costing\/\">Tools and techniques of marginal costing<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budget\/\">Budget<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/break-even-point\/\">Break even point<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/process-of-budgetary-control\/\">Process of budgetary control<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/explain-the-advantages-and-limitations-of-budgetary-control\/\">Advantages and limitations of budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/budgetary-control\/\">Budgetary Control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/zero-base-budgeting\/\">Zero base budgeting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/standard-costing\/\">Standard Costing<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/commerceiets.com\/variance-analysis\/\">Variance Analysis<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-standard-costing-and-budgetary-control\/\">Standard costing vs budgetary control<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-management-accounting-and-cost-accounting\/\">Management accounting vs cost accounting<\/a><\/td><td><a href=\"https:\/\/commerceiets.com\/difference-between-financial-accounting-management-accounting-and-cost-accounting\/\">Cost accounting vs financial accounting<\/a><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/www.linkedin.com\/in\/kajal-mahajan-7549b2197\/\" target=\"_blank\" rel=\"noreferrer noopener\">CONNECT ON LINKEDIN<\/a><\/div>\n<\/div>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"512\" height=\"152\" src=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1.jpg\" alt=\"Traditional Costing Vs ABC Costing\" class=\"wp-image-4836\" srcset=\"https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1.jpg 512w, https:\/\/commerceiets.com\/wp-content\/uploads\/2019\/04\/cropped-cropped-Presentation-resize-1-300x89.jpg 300w\" sizes=\"(max-width: 512px) 100vw, 512px\" \/><figcaption>Traditional Costing Vs ABC Costing<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Traditional Costing Vs ABC Costing The difference between Traditional costing vs ABC costing is as follows: BASIS OF DIFFERENCE TRADITIONAL COSTING ACTIVITY BASED COSTING MEANING &nbsp; Traditional costing is the&nbsp;allocation&nbsp;of&nbsp;factory overhead&nbsp;to products based on the volume of production resources consumed. The Activity-Based Costing (ABC) is a costing system, which focuses on activities performed to produce&#8230;<\/p>\n<p class=\"more-link-wrap\"><a href=\"https:\/\/commerceiets.com\/traditional-costing-vs-abc-costing\/\" class=\"more-link\">Read More<span class=\"screen-reader-text\"> &ldquo;DIFFERENCE BETWEEN TRADITIONAL COSTING AND ACTIVITY BASED COSTING&rdquo;<\/span> &raquo;<\/a><\/p>\n","protected":false},"author":2,"featured_media":3367,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[187,56],"tags":[],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3365"}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=3365"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/3365\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/3367"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=3365"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=3365"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=3365"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}