Comparison of traditional and ABC systems

Question 1

Similarities

Answer 1

Both use a two-stage allocation process.

Question 2

Differences

Answer 2

1)ABC allocates costs to activities while traditional allocates costs to departments.
2)Traditional uses more arbitrary basis’ while ABC only uses cause-and-effect, cost drivers.
3) ABC doesn’t reallocate service back to other departments but instead has its own cost drivers for these departments.

Question 3

When is traditional more appropriate?

Answer 3

1) Direct costs were the dominant cost.
2) Information costs were high
3) Lack of global competition
4) Limited range of products

Question 4

What is the difference between volume-based and non-volume-based cost drivers?

Answer 4

Volume-based drivers are assumed to be directly related to units produced even when it is not true.

Question 5

What are the four steps for ABC systems?

Answer 5

1) Identify major activities which take place.
2) Assign costs to activity cost centres.
3) Select appropriate cost drivers.
4) Assign the cost of activities to products according to the product’s demand for activities.