Difference Between ABC and Traditional Costing

ABC vs Traditional Costing

The difference between ABC or Activity Based Costing and TCA or Traditional Cost Accounting is that ABC is complex whereas TCA is simple.

The ABC system began in 1981 whereas TCA methods were designed and developed between 1870 to 1920. In the TCA system, the cost objects and used up resources are required to evaluate the cost whereas in the ABC system the cost is dependent upon the activities used up by the cost objects.

Activity Based Costing is accurate and preferred over the TCA cost management system. The ABC method of cost management system is adopted when the overheads of the company are high and there are large numbers of miscellaneous products. Inaccuracy or errors are most unwanted and undesirable because of the competitive rates set by the competitors in the market. Due to this heavy and stiff competition, a highly reliable and accurate method is required for the cost management.

TCA or Traditional Cost Accounting uses a single overhead pool and is not able to calculate the true cost. The costs of the objects are allocated randomly based upon the labor or machine hours etc. ABC costing includes identifiable products parts or labor whereas TCA arbitrarily accumulates expenses, salaries, depreciations etc.

Smaller targeted costs that are built upon activities are calculated with the help of the ABC system. The ABC system is advantageous since it helps in simplifying the decision making process and it makes management concepts become clear and target -oriented. It also helps in evaluating performances and sets standards which can help the manager to use this information for comparison purposes.

In the Traditional Cost Accounting System, the company determines the cost of production after the products have been produced whereas in the target or Activity Based Accounting System, the value or cost of the product is determined on the basis of customer feedback and pocket range. The ABC system helps the company to determine whether to lower or raise the activities cost to grab the consumers. The ABC system also helps in keeping up with the competitors without sacrificing the quality and the quantity of the products.

Summary:

1. Traditional cost accounting is obsolete whereas Activity Based Accounting is used more by various target-oriented companies.

2. ABC methods help the company to identify the needs of keeping or eliminating certain activities to add value to the products.

3. TCA methods focus on the structure rather than on processes whereas ABC methods focus on the activities or processes rather than on the structure.

4. ABC provides accurate costs whereas TCA accumulates values arbitrarily.

5.  TCA is almost obsolete whereas  ABC methods are largely in use since 1981.

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