ABC vs. Traditional Costing Systems

Study Notes

ABC vs. Traditional Costing Systems

Activity Information: ABC provides detailed information about individual activities within a department, while traditional systems offer summarized cost information for entire functions.
Focus: ABC focuses on activities as the main cost driver, whereas traditional systems use products or outputs as the driving factor.
Cost Driver: ABC uses specific cost drivers for each activity, measured by the activity's outputs. Traditional systems employ a single overhead rate calculated by dividing total overhead costs by the volume of the cost driver.
Allocation Basis: ABC utilizes multiple cost pools, each allocated to a specific activity. Traditional systems typically use a single cost pool for allocating overhead costs.
Cause-and-Effect Relationship: ABC prioritizes a high probability that the cost driver directly influences the cost of an activity (for example, more cases lead to higher costs). Traditional systems' cause-and-effect relationship might be less reliable or precise.
Cost Determination: ABC determines product costs by accumulating the costs of each activity contributing to the product. Traditional systems divide total costs by the total units of output to determine product costs.
Computational Complexity: ABC calculations are advanced. Traditional systems allow for both manual and advanced calculations.
ABC systems are more complex but provide more accurate cost determination than traditional systems.

Description

This quiz explores the differences between Activity-Based Costing (ABC) and traditional costing systems. It highlights various aspects such as focus, cost drivers, allocation bases, and the cause-and-effect relationships that underpin these methodologies. Test your knowledge on how these systems operate within departments and their implications for cost management.