What is traditional costing

In traditional costing overheads are first related to cost centers (production and service centres) and then to cost object, i.e. production. ABC overheads are related to activities or grouped into cost pools (depending on the terminology preferred). Then they are related to the cost objects for example production. The two processes are therefore very similar but the first stage Is different as ABC uses activities instead of functional departments (cost centres) . the problem with functional departments is that they tend to include a series of different activities which incur a number of different cost that behave in different ways. Activities also tend to run across function for instance procurement of materials often includes raising a requisition note in a manufacturing department or stores. it is not in the purchasing department where most procurement costs are incurred. Activity cost tend behave in a similar way to the way in which casts behave.

As with traditional absorption costing ABC rates are calculated in advance normally for a year ahead and so the same rates are used for at a time. The advantage of this is that any seasonal variations will be spread giving an average cost. If this was not done and actual rates were used the absorption rates would vary monthly. This would mean that when output was high the overhead rate would be low and vice versa; if pricing were based on cost the prices quotes would be higher when the business was slack.