## Traditional Absorption Costing vs Activity Based Costing (ABC)

Both systems aim to charge overheads to products, but they route those overheads through very different paths.

### The core difference in flow

Traditional Absorption Costing: Overheads are first collected in cost centres (Production & Service Centres) and then absorbed into cost objects (products/jobs).
ABC: Overheads are first grouped into activities / cost pools and then assigned to cost objects using cost drivers.

```

Traditional: Overheads -> Cost Centres -> Cost Objects

ABC: Overheads -> Activities / Cost Pools -> Cost Objects

```

### Point-by-point comparison

#	Activity Based Costing	Traditional Absorption Costing
1	Overheads related to activities, grouped into activity cost pools	Overheads related to cost centres/departments
2	Costs traced to activities — more realistic of cost behaviour	Costs traced to cost centres — not realistic of cost behaviour
3	Activity-wise cost drivers are determined	Time (hours) assumed to be the only cost driver in all departments
4	Activity-wise recovery rates; no single OH recovery rate	Either multiple departmental rates or a single blanket OH rate
5	Costs assigned to cost objects (customers, products, services, departments)	Costs assigned to cost units (products, jobs, hours)
6	Unnecessary activities can be eliminated → aids cost control	Cost centres/departments cannot be eliminated → not suitable for cost control

### Cost allocation basis

Traditional: allocation based on machine hours, labour hours, volume, etc.
ABC: allocation based on the relevant cost driver for each activity.

### Why it matters

Because traditional costing assumes hours/volume drive all overheads, it tends to over-cost high-volume simple products and under-cost low-volume complex products. ABC corrects this by matching each pool of cost to the activity that actually causes it.

⚠️ Common exam mistakes

Saying ABC has no overhead recovery rate at all — ABC does have activity-wise recovery (cost driver) rates; what it lacks is a single blanket OH rate.
Confusing cost objects with cost units — in ABC costs go to broader cost objects (customers, services, departments), not only to products/jobs.
Assuming traditional costing always uses a single rate; it may use multiple departmental rates OR a single blanket rate.
Forgetting that the key reason ABC aids cost control is that non-essential activities (and their costs) can be eliminated, whereas departments cannot.

Reference:

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