ABC and traditional systems are quite similar in:
a. evaluating performance
b. the allocation of overheads
c. the identification of cost pools
d. the treatment of direct costs
The correct answer and explanation is:
The correct answer is d. the treatment of direct costs.
Both Activity-Based Costing (ABC) and traditional costing systems are similar in the way they treat direct costs. Direct costs, such as direct labor and direct materials, are directly traceable to specific products or services in both systems. These costs are allocated to products or services without any need for allocation bases or indirect measures. The treatment of direct costs is straightforward and does not differ between the two systems.
In contrast, ABC and traditional costing systems differ in how they handle indirect costs (overheads). Traditional costing systems typically allocate overhead costs using a single allocation base, such as labor hours or machine hours, which can lead to less accurate cost allocation. ABC, on the other hand, assigns overhead costs based on multiple cost drivers, such as the number of setups, machine hours, or inspection hours. This provides a more accurate method for assigning overheads to products.
The identification of cost pools also varies between the two systems. In traditional costing, overhead is generally grouped into one or two cost pools, while in ABC, multiple cost pools are created based on different activities or processes. This allows ABC to reflect the more complex nature of overhead costs and their relationship to different activities in the production process.
When it comes to evaluating performance, the two systems may use different methods to assign costs, which can result in different views of performance. ABC offers more detailed insights into the cost of specific activities, leading to better-informed decision-making. However, traditional costing may be simpler and easier to implement in some cases, though it can provide less accuracy in cost allocation, particularly for more complex organizations.