ABC (Activity Based Costing) is a way of assigning costs for goods or services based on the activities or resources that are consumed by these activities. on the other hand, traditional costing is a method of assigning costs by way of allocation of arbitrary percentages per overhead or what is commonly referred to as indirect system of costing. The major variation between ABC and traditional costing is that in as much as the former looks at the “true costs” of individual products coupled with the services in an accurate manner, the latter deals with an arbitrary system of assigning costs to goods and services.
ABC also contrasts with the traditional system of costing in the sense that it provides precise knowledge of the cost of each individual product or each individual service, whereas this knowledge may be obscured under the system of traditional cost accounting. On the other hand, the traditional way of accounting is a system of assigning manufacturing overhead with the basis of the volume of the cost driver, which includes the total labor hours, while ABC assigns the total value of outcome depending on the experience put into the activity.
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ABC is thus a forum of investment into the total quality put into an activity, whereas the traditional costing is a system of reward to the total time invested into an activity. The essence of Activity Based Costing is to identify unprofitable products or to identify the true costs of these products in line with the consumer behavior as a way of designing the pricing methods. On the other hand, the traditional costing method does not give the actual cost of the product, where the cost of the services or goods is obscured and it can therefore not give a preamble into the pricing method.
