Question

What is the difference between traditional cost systems and ABC cost systems?

Answer 1

(Q) What is the difference between traditional cost systems and ABC cost systems?

• The difference between  Activity Based Costing and Traditional Cost Accounting is that Activity Based Costing is complex whereas Traditional Costing System is simple.
• The Activity Based Cost system began in 1981 whereas Traditional Cost System methods were designed and developed between 1870 to 1920.
• In the Traditional Costing system, the cost objects and used up resources are required to evaluate the cost whereas in the ABC system the cost is dependent upon the activities used up by the cost objects.
• Traditional Cost Accounting uses a single overhead pool and is not able to calculate the true cost. The costs of the objects are allocated randomly based upon the labor or machine hours etc. ABC costing includes identifiable products parts or labor whereas Traditional Costing system arbitrarily accumulates expenses, salaries, depreciation etc
• In the Traditional Cost Accounting System, the company determines the cost of production after the products have been produced whereas in the target or Activity Based Accounting System, the value or cost of the product is determined on the basis of customer feedback and pocket range.
• Activity Based Costing is accurate and preferred over the Traditional cost management system. The ABC method of cost management system is adopted when the overheads of the company are high and there are large numbers of miscellaneous products.
• Traditional cost accounting is obsolete whereas Activity Based Accounting is used more by various target-oriented companies.
• Traditional Costing System methods focus on the structure rather than on processes whereas ABC methods focus on the activities or processes rather than on the structure.
• ABC provides accurate costs whereas Traditional Cost System accumulates values arbitrarily.
• ABC methods help the company to identify the needs of keeping or eliminating certain activities to add value to the products