What is activity method?

What are the similarities of activity based costing system and traditional costing method?

• Answer:

  Traditional costing and activity-based costing (ABC) is to comment on the uniqueness of the products received. In traditional based costing, costs can be allocated to all products, because they are not unique. Traditional based costing works well for homogenous products that go through the same manufacturing process. ABC works well for products that are not homogenous and that can be run into batches. It helps apply costs to products that perhaps have had more "activities" applied to them; so therefore, they should be allocated more costs. For an example, assume that you and your friends go to a restaurant as a group. At the end of the meal, you must decide how the bill for the group should be shared. One alternative is to figure out the cost of what each individual consumed and divide up the bill accordingly. Another alternative is to split the bill equally among the individuals. In this example of of the restaurant, if the consumers split the bill up equally, they would be applying the same costs to each of their meals. They would be in a sense saying that each meal provided the same value. However, if they split the bill up according to the consumption of each individual, so in a sense allocating the costs out specifically, they would be acknowledging that each meal did provide different value, so the person eating a hamburger should pay less then a person eating a lobster.