Traditional Costing System and ABC System | Cost Accounting

The upcoming discussion will update you about the difference between Traditional Costing System and Activity-based Costing System (ABC).

Difference # Traditional Costing System:

1. Single or limited number of cost pools or cost centres exist.


2. Overhead costs are first related to the various production and service departments and then to products.

3. Overhead costs are charged to products on a production volume-related basis such as direct labour hours, machine hours etc. As a result, traditional system leads to over- cost high volume products and under-cost low volume products.

4. Since the overhead costs are related to the cost centres or departments a realistic picture of the cost behaviour is not portrayed.

5. It assumes simple labour-based production norm and overhead costs are in small proportion because support or servicing functions are less.

6. Only two levels of activity i.e., facility level and unit level are identified.

7. It is simple and inexpensive.

Difference # Activity-based Costing System (ABC):


1. Many activity-based cost pools or cost centres are created to reflect different activities.

2. Overhead costs are first related to activities or grouped into cost pools. This costing system assumes that activities are responsible for the incurrence of costs and products create demands for activities.

3. It recognizes that volume is one of many cost drivers and uses multiple cost drivers to assign overhead costs to products. This system improves the accu­racy of product cost.

4. It portrays more realistic cost behaviour since the overhead costs are related to cost drivers.


5. It assumes production is automated and computerized and overhead costs constitute a very high proportion of total costs as compare to labour. Overhead costs are more affected by range and complex­ity of products manufactured.

6. All levels of activities in the manufacturing cost hierarchy i.e., unit level, batch level, product level and facility level are identified.

7. It is a more accurate and reliable system of deter­mination of product costs. It helps to identify non-value-added activity so that they may be weeded out.

, , , ,

Related pages

target costing pdfdistinguish between capital receipt and revenue receiptexplain material requirement planningin a period of rising prices fifo will havedifference between promissory note and bill of exchange pdfsale ledger control accountimportance of flexible budgetwipro life sciencedefine debt burdentypes of shares and debenturesbase stock method of inventory valuationmeaning of postulatelife cycle costing methodadvantages of abc costingexample of target costingwhat are subsidiary journalsadministrative overheadsdefine imprestforex treasury managementequity theory definitionhow to calculate break even ebitlabour turnover definitionhindi meaning of payeepareto efficiency allocationadvantages and disadvantages of fifotrading on the equity leverage refers to theaccountants refer to an economic event as aaccounting single entry systempareto optimality economicsmerits and demerits of companysignificance of capital budgetingloan appraisal procedurebank promissory notedifference between fixed budget and flexible budgetlife cycle costing analysispaul samuelson public goodsadvantages and disadvantages of bondsshares debentures and bondsdifference between marginal costing and absorption costingdifferentiate between trade discount and cash discountadvantage of absorption costingrights of debenture holderscompute the weighted average cost of capitalstandard cost variance definitionmeaning of operating leveragecompleted contract method revenue recognition examplecomputing depreciationoverhead absorptionformat bank reconciliation statementdividend decision in financial managementburden meaning in hindisales mix percentage formulacvp analysiscapital gearing ratio meaningsegmental reportingconcept of marginal costingpreference shares redemptionmargin of safety in units formulaaccounting concept meaninglabour turnover ratiomrp system benefitslic premium balanceraw material usage variancelabour variancesexample of economic entity assumptionapplied overhead ratesales ledger meaningcapital budgeting and risk analysismerits of double entry systemwipro limited usavca costdividend yield valuation methodredemption of debentures by sinking fund methodimputation tax creditstandard costing variance formulas