What's the difference between activity-based costing and traditional costing? What is the connection?

The difference between activity-based costing and traditional costing is that under activity-based costing, manufacturing expenses are allocated according to various activity drivers; Under the traditional cost method, manufacturing expenses are mainly allocated by a single allocation standard. The traditional cost calculation method is to collect indirect expenses by department, while activity-based costing is to collect indirect expenses by activity. Compared with the traditional cost calculation method, activity-based costing is not convenient to implement responsibility accounting and performance evaluation.

Under the traditional cost method, the product is the object of cost allocation, and the proportion of a certain resource consumed by a unit product to the total consumption of such resources in the current period (such as labor hours and machine hours) is the basis of all indirect manufacturing expenses allocation, which is based on cost. In the high-tech environment, the amount and importance of "manufacturing expenses" in product costs have greatly increased. At the same time, the correlation between manufacturing cost and traditional cost allocation standards such as direct labor cost, machine working hours and direct labor working hours is getting smaller and smaller. If the manufacturing expenses are still allocated according to the original single standard, the obtained cost accounting results will inevitably be distorted, and this distorted cost information will even lead to mistakes in business decisions.

Activity-based costing not only greatly improves the accuracy of cost calculation results, but also guides business operators to pay close attention to cost drivers, thus overcoming the ambiguity of indirect cost responsibility in traditional costing methods, so that many indirect costs that cannot be controlled under traditional costing methods can find relevant responsible persons in the new accounting system and carry out necessary cost control. With the application of activity-based costing and its popularity in the management field, activity-based costing information has been widely used in budget management (such as ABB), inventory pricing, product pricing, new product development, product portfolio decision-making, self-made or purchase decision-making, customer profitability analysis, performance evaluation, etc., thus becoming the core and foundation of strategic cost management.