Activitybased costing assigns costs to activities that consu

Activity-based costing assigns costs to activities that consume resources and the products based on each product\'s use of activities. What is a benefit of this approach compared to a traditional approach that allocates costs to products based on the machine-hours or labor hours used to produce the produet?

Solution

Activity Based Costing or ABC determines actvities of production, assign costs bases on cost drivers and then determine the cost of the product.

Under Traditional Costing, cost is allocated on an average rate which is calculated based on labour hours or machine hours.

Benefits of ABC over Traditional costing

1. ABC is more accurate than traditional costing as it takes in to account important factors while assigning costs to the products and provides more precise breakdown of indirect costs

2. ABC is more beneficial to businesses with high overhead costs that manufacture products

3. ABC helps in identifying activities which are needed and which can be eliminated to add value to products

4. Traditional Costing tends to distirt information. ABC helps in calculating true costs of the product