What is the difference between Activity-based costing and traditional cost accounting?
Activity-based costing is a more accurate cost management system than TCA. One would use the ABC method when overhead is high, products are diverse, cost of errors high and competition is stiff Traditional Cost Accounting is unable to calculate the 'true' cost of the product. TCA arbitrarily allocates overhead to the costs of objects.
Total company's overhead is allocated to the products based on volume based measure e.g. Labor hours, machine hours.
An advantage of using traditional-based costing is that it aligns with Generally Accepted Accounting Principles, or GAAP. Easy implementation for companies that provide one product also is a plus. However, traditional costing is an outdated costing system in many companies because those manufacturing companies now use machines and computers for much of their production.
Computers and machines make the system outdated because it often uses direct labor hours to calculate cost. Cost is not appropriately assigned because direct labor hours is not the best cost driver to use. Traditional costing negates other cost drivers that may contribute to the cost of an item.
Another disadvantage of solely using the traditional costing system is that it can lead to bad management decisions because it excludes certain nonmanufacturing costs. Related Reading: Activity-Based Management Vs.
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