What is the Difference Between Absorption Costing and Activity Based Costing?
🆚 Go to Comparative Table 🆚Absorption costing and activity-based costing are two different methods used to allocate costs to products in cost accounting. The main differences between these two methods are:
- Approach: Absorption costing assigns costs to individual units, while activity-based costing focuses on company activities as a central cost and then attempts to assign indirect costs to units.
- Allocation: Absorption costing uses a single base to allocate all costs, whereas activity-based costing uses multiple cost bases for cost allocation.
- Time Consumption and Accuracy: Absorption costing is less time-consuming and less accurate, while activity-based costing is time-consuming but has increased accuracy.
- Usage and Popularity: Absorption costing is a traditional costing system and is widely used, while activity-based costing is a modern method of cost allocation and is preferred by many managers due to its nature and relevance of information.
- Implementation: Traditional costing is easy to implement and is the most common costing method used, whereas activity-based costing can be extremely complicated and difficult to implement.
In summary, absorption costing is a simpler and more widely used method for allocating costs, while activity-based costing provides a more accurate and detailed picture of costs but can be more complex and time-consuming to implement.
Comparative Table: Absorption Costing vs Activity Based Costing
The main differences between Absorption Costing and Activity-Based Costing are as follows:
| Feature | Absorption Costing | Activity-Based Costing |
|---|---|---|
| Method | Assigns costs to individual units based on a single cost base | Focuses on company activities as a central cost, then assigns costs to individual units using multiple cost bases |
| Time Period | Less time-consuming and less accurate | More time-consuming but has increased accuracy |
| Usage and Popularity | Traditional costing system, less popular | Modern method of cost accounting, gaining fast popularity |
| Allocation of Overhead Costs | Allocates fixed overhead costs to each unit of product | Allocates overhead costs based on various resources used to make the product |
| Orientation | Cost-driven | Process-driven |
Absorption costing is a traditional method that assigns costs to individual units based on a single cost base, such as direct labor or machine hours. It is less time-consuming and less accurate compared to activity-based costing. This method is more suitable when direct labor is a large portion of the product cost.
On the other hand, activity-based costing is a modern method that focuses on company activities as a central cost and then assigns costs to individual units using multiple cost bases. It is more time-consuming and costly to implement but provides increased accuracy. This method is more suitable when technology is a large portion of the product cost.
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