Question

Compare the ABC costing system with the Standard or Traditional Costing System.

Answer 1

Traditional Costing System and Activity based Cost Drivers:

Traditional Costing System also known as the Volume based costing system is used in allocating overhead cost to products. It is a cost allocation technique where the volume of direct labour or the direct machine hour is used to determine a plant wide overhead rate and based on that rate overhead is allocated to different products multiplying by the volume of labour or machine hour consumed by the respective product.

Activity based costing system is a more scientific and rational costing technique where different activity is considered for allocating overhead cost related to that activity to the various products.

Volume based cost driver considers a single activity to allocate the overhead cost. There are various costs included in the overhead cost such as indirect labour, indirect materials, and other indirect expenses. It may so happen for a company that some product line consumes high indirect materials or some product consumes high indirect labour. If only one base is considered to allocate the total overhead cost then there is a definite chance of error in allocating the overhead cost. So, to allocate the total overhead cost accurately and scientifically we need to use more than one activity as the base and its weight for each base for each product line is to be considered and there from we get the concept of Activity Based Costing system. So, Activity based costing is a more updated, modern and scientific system which eliminates the limitations of traditional or volume based costing system and it helps to ascertain the cost more accurately.

From the above discussion I hope you got the core of these two system.

Thank You..!!