Activity based costing was introduced in early 1980's as an alternate of traditional cost accounting.
Activity based costing ensure the accurate estimation of resources required to produce various products, render service and even cater all types of customers. ABC traces direct cost such (direct material and direct labor) and indirect cost such as overheads. Each of the activity has its own cost driver to allocate these indirect costs. (Bamber L.S and Braun K.W )
Furthermore, CIMA terminology explained ABC is "a technique of cost attribution to cost units on the basis of benefits received from indirect activities" .In other word, it can be defined as a tool to identify the cost absorption in each activity on different production. (Leslie Chadwick, 1998)
According to , traditional based costing face difficult when computing the proper amount of overhead costs. So that the new approach which is Activity based costing was introduced to assign the activity cost pools by utilizing the cost drivers.
Cost pools are an accumulating cost of individual activity cost based on department of an organization. Whereas, cost driver is explaining the relationship between an activity and resources being utilized for the activity. (Weygandt J.J, Kimmel P.D , et al 2009)
Comparison between Traditional based costing and Activity based costing
i) Features of Traditional based costing
The traditional method to cost allocation divided into three basic steps. The first is the accumulation of costs within a production or non-production department.Then, allocate non-production costs to production departments. Finally, allocate the resulting production department costs to various products, services or customers.
This method leads to inaccurate cost allocation as it shows the accumulation of cost's from various production departments. Even more, we can't identify very detailed usage of resources in each department as the calculation on accumulated...