The overriding issue with Activity-Based Costing is, while it provides a more accurate picture for internal decision making, it is not required by GAAP (Generally Accepted Accounting Principles) and therefore an extra cost. There are many benefits to an Activity-Based Costing system, including but not limited to, a more accurate description of where costs originate from, better placement of overhead costs, the ability to determine if one product/service is more profitable than another and the ability to determine if one product/service is operating at a loss and should either be restructured or replaced. As we see in our case, Traditional Costing presents one picture while Activity-Based Costing paints a different picture with great room for improvement.Technically, the main difference between Traditional Costing and Activity-Based Costing (ABC) is ABC uses different cost drivers for each overhead cost rather than assuming all costs operate at the same ratio as the predetermined cost driver.
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