• 6 Marks

MA – Nov 2016 – L2 – Q1b – Activity-based costing

Explain the similarities and differences between activity-based costing and the traditional system of assigning overheads to products.

Identify and explain briefly THREE similarities and TWO differences between activity-based costing and the traditional system of assigning overheads to products. (6 marks)

Similarities:

  1. Allocation, Apportionment, and Absorption: Both systems apply the principles of allocating, apportioning, and absorbing overheads.
  2. Over and Under Absorption: Both systems may result in over or under absorbed overheads if predetermined rates are used.
  3. Use of Cost Centers: Both systems utilize cost centers that align with the company’s operating system.

Differences:

  1. Number of Rates Used: Traditional costing uses a single overhead absorption rate, while activity-based costing (ABC) uses multiple rates.
  2. Cost Assignment Basis: Traditional costing assigns costs to cost centers, whereas ABC assigns costs to cost pools and then uses cost drivers to allocate those costs to products.

(Total: 6 marks)

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