## Traditional Absorption Costing vs ABC
- In traditional absorption costing, overheads are first related to cost centres (production & service centres), then to cost objects.
- In ABC, overheads are related to activities (grouped into cost pools), then to cost objects.
### Point-by-point Comparison
| Activity Based Costing | Traditional Absorption Costing |
|---|---|
| Overheads related to activities and grouped into activity cost pools. | Overheads related to cost centres/departments. |
| Costs related to activities → more realistic. | Costs related to cost centres → less realistic of cost behaviour. |
| Activity-wise cost drivers determined. | Time (hours) assumed to be the only cost driver in all departments. |
| Activity-wise recovery rates; no single overhead recovery rate. | Multiple departmental rates or a single overhead recovery rate. |
| Costs assigned to cost objects (customers, products, services, departments). | Costs assigned to cost units (products, jobs, hours). |
| Essential activities simplified, unnecessary ones eliminated → aids cost control. | Cost centres/departments cannot be eliminated → not suitable for cost control. |
### Cost Allocation Basis
- Traditional: based on machine hours, labour hours, volume, etc.
- ABC: based on cost drivers.
### Product Cost Statement — Traditional Absorption Costing
| Particulars | Amount (₹) |
|---|---|
| Direct Material | xxx |
| Direct Labour | xxx |
| Direct Expenses | xxx |
| Factory OH (OH Absorption Rate × Actual Base Qty): Dept A, Dept B | xxx |
| Total Cost | xxx |
### Product Cost Statement — ABC
| Particulars | Amount (₹) |
|---|---|
| Direct Material | xxx |
| Direct Labour | xxx |
| Direct Expenses | xxx |
| Factory OH (Cost Driver Rate × Cost Driver Qty): Activity 1, 2, 3 | xxx |
| Total Cost | xxx |
> Key difference in the statements: Direct costs are identical under both methods; only the factory overhead line differs — absorbed by department base under traditional costing, and by activity cost driver under ABC.