Question

Which allocation base is preferable under traditional costing and why?

Which costing system (traditional or activity-based) is preferable in pricing decisions and why?

Answer 1

allocation base in traditional costing depends on the nature of the industry, if the industry is labor intensive it would be preferred to use Labor hours as base of allocation of overheads and if the industry is capital intensive it would be better to allocate overheads with the help of machine hours because it adds an average overhead rate to the direct costs of manufacturing products

Activity based is generally preferred over traditional costing because in traditional overheads are allocated using average rate of overheads on the basis of machine hours or labor hours while in ABC overheads are assigned using different cost drivers which gives an accurate allocation of overheads.