Question

when is it better to use the ABC method over the traditional method? Why would it be better?

Answer 1

Solution:

ABC method and traditional method both are used to allocated overhead to prodcution based on a cost driver rate. The differences are in the accuracy and complexity of the two methods.

Traditional costing is simple but less accurate than ABC, as this method assign overerhead costs to products based on predetermined rate of one cost driver like direct labor hours, machine hours etc.

ABC is more complex and more accurate than traditional costing. This method first assigns indirect cost to activites then assigns the costs to products based on the usage of the activities in product.

ABC method is better to use over traditional method when there are lots of activites involved in the production of different products and usage of activities vary across the products and cost related to each and every activity is identifiable.

ABC is better because it results in costing accuracy. Companies assign cost only to the products that require the activity for production. This method eliminates allocating irrelevant costs to a product.