Business owners have to know the difference between using traditional costing and activity-based costing to make their company reach its full potential for profit. This is apart from the popular fact that accounting software is equally important.

Basically, the traditional costing is used commonly by manufacturing companies to assign manufacturing overheads to the units they produce. Using this, only the products are assigned an overhead cost by the accountant. The downside of this method of costing is that it neglects to consider the non-manufacturing costs like administration expenses which are associated with production. Today, such method is considered outdated because a lot of the manufacturing companies already use computers and machines for their production. Also business accounting software is already being used widely. On the brighter side, the traditional costing is easy to use especially for those companies that have one product.

On the other hand, the activity-based costing (ABC) is a more logical method of assigning manufacturing overhead costs to products. Unlike traditional costing that simply assigns costs based on the machine work hours, the ABC assigns costs first to the activities and processes that cause the overhead. Then, these costs are assigned only to the products that require the activities. Simply saying, the ABC is typically used as a supplemental costing system for businesses.

In a nutshell, the following are the basic differences of the two methods of costing.
  1. The traditional costing method focuses on structure rather than on processes while the ABC is more on the activities than on structure.
  2. Traditional costing method is already obsolete especially with the changing technology trends such as the introduction of the business accounting software.
  3. The ABC provides more accurate costs of products.
  4. Whereas the traditional costing method has increasingly become obsolete, the ABC became a rising method since 1981.
Are you in need of business accounting software? Talk to Shoebooks in Australia today and be enlightened on the different packages they have for your business.

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