Traditional Costing versus Activity Based Costing

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Traditional Costing versus Activity Based Costing
Ll, Member
When should I choose the traditional costing instead of ABC?
Compared with traditional costing, what are the drawbacks of ABC?

ABC versus Traditional Accounting
Joseph Rivera, Member
Traditional accounting has a purpose to meet a specific need. I think that ABC was not developed to replace traditional accounting, but rather to serve another type of need, specifically the allocation of oh cost because some people think that ABC is a better way to do it.

ABC versus Traditional Accounting
Nicolas Forgues, Member
Clearly ABC is a form of analytical accounting but not linked to the organization as traditional accounting used to do it. ABC looks in a different way in order to allocate all indirect costs (not only overhead) in regard to standard activity of a business (i am in it) and if using same reference as other companies (in France, the ABC model has been standardized in it through cigref association) allows more quick and easy benchmark enhancing the capability to compare its own performance. I found it very complementary and useful especially if an industry is pretty much standardized or normalized in terms of activity definition and implementation.

ABC versus Traditional Accounting
van Boxtel, Member
It depends on what your information need is. If you're interested in product or customer profitability, ABC can be useful.
This would normally only be the case when you serve multiple markets and/or customers with a diverse range of products.
ABC allows more precise product and customer profitability, using whale curves for example.
The major drawback of Activity Based Costing is the allocation of indirect / overhead costs to products. Finding the right cost driver for allocating these costs can be complex and timeconsuming. It might require additional registration of activities.

ABC versus Traditional Accounting
Joseph Rivera, Member
As the name suggests, it is the costing part in which ABC is sometimes better than traditional accounting.
I agree that costing must be diverse / complex enough to warrant the use of ABC because of the cost involved in gathering the required driver information.
On the other hand, activities can be limited to a major processes, or even sub-processes, in the initial stages to prove the concept and then move to detailed activities as soon as practicable if found feasible.


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