Activity-based costing is a method of allocating overhead cost by allocating it basing on the activities which drive it rather than using an arbitrary allocation base as in the traditional costing.
The following are differences between activity-based costing (ABC) and the traditional system of assigning overhead to product
- The traditional system uses a single rate while activity-based costing uses multiple rates.
- Traditional systems apportion cost to cost centers while activity-based costing (ABC) puts cost into cost pools.
- Activity-based costing (ABC) will look for cost drivers as the basis of establishing the absorption rate while the traditional system may use any acceptable base