Question

Explain the differences between traditional job costing and activity based costing

Answer 1

Answer:

The differences are as follows:

1. In traditional costing, overheads are related to departments, and are distributed accordingly. In Activity based costing, overheads are grouped into activity cost pools and are then applied according to activities.In other words, in traditional costing, overheads are applied to production and service centres directly. In Activity based costing, the overheads are related to activities, and are then applied to the products.
2. In traditional costing, time hours or units is the only cost driver in all departments. In Activity based costing, activity wise cost drivers are calculated.
3. In traditional costing, costs are assigned to the cost units such as products or jobs or hours. In Activity based costing, costs are assigned to cost objects such as customers, products, departments, etc.
4. Activity based costing is more realistic than traditional costing because costs are divided into activities.

In case of any doubt, please comment.