Why is activity-based costing more accurate and what is the difference between it and traditional cost accounting?

The main difference between traditional cost accounting method and activity-based costing method lies in the distribution of manufacturing expenses and period expenses. Activity-based costing is also more accurate, because the allocation of this part of the cost is more accurate.

First of all, the traditional cost method uses machine hours or labor hours to allocate, which can't truly reflect the causes of manufacturing expenses and period expenses, so the allocated expenses are not accurate.

The most important thing of activity-based costing is to allocate resources (expenses) to activities, and then allocate the cost of activities to products, so as to find out the causes of costs (activities) more accurately.

It may be difficult to understand the operation here. For example, if it is necessary to clean the machine before the product is dyed, then the step of cleaning the machine is operation. You have to calculate how many resources (water, electricity, chemical raw materials, etc.) you have first. ) are consumed in this cleaning step, and then look at how many times the machine has been cleaned before it can dye this batch of products, and you can know how much cleaning cost this batch of products has shared.

Compared with the traditional cost method, that is, taking machine hours to remove the whole cleaning cost, it is certainly not as accurate as activity-based costing.

Generally speaking, activity-based costing will allocate costs according to the business process of enterprises. This method is more accurate, but it is also more complicated.