Departmental allocation does not result in more accurate costing results than ABC does. Activity-based costing focuses on individual activities as the fundamental cost objects. In ABC, the premise is that the cost of a finished product should include the cost of direct materials, direct labor and overhead costs directly attributable to that product, and it should also include a portion of the administrative costs necessary to produce the product. With ABC, the cost allocations are not based on usage of resources. Instead, they are based on activities performed and what those activities cost. ABC is much more detailed than traditional costing, because it uses many more cost pools, and each cost pool has its own cost driver. But it results in a more accurate cost for products.
Departmental allocation does not result in a greater number of allocation bases. Activity-based costing focuses on individual activities as the fundamental cost objects. In ABC, the premise is that the cost of a finished product should include the cost of direct materials, direct labor and overhead costs directly attributable to that product, and it should also include a portion of the administrative costs necessary to produce the product. With ABC, the cost allocations are not based on usage of resources. Instead, they are based on activities performed and what those activities cost. ABC is much more detailed than traditional costing, because it uses many more cost pools, and each cost pool has its own cost driver. But it results in a more accurate cost for products.
Departmental allocation does not result in a greater number of allocation bases; and departmental allocation does not result in more accurate costing results. Activity-based costing focuses on individual activities as the fundamental cost objects. In ABC, the premise is that the cost of a finished product should include the cost of direct materials, direct labor and overhead costs directly attributable to that product, and it should also include a portion of the administrative costs necessary to produce the product. With ABC, the cost allocations are not based on usage of resources. Instead, they are based on activities performed and what those activities cost. ABC is much more detailed than traditional costing, because it uses many more cost pools, and each cost pool has its own cost driver. But it results in a more accurate cost for products.
Activity-based costing requires the use of a greater number of allocation bases; and activity-based costing also results in more accurate costing results. Activity-based costing focuses on individual activities as the fundamental cost objects. In ABC, the premise is that the cost of a finished product should include the cost of direct materials, direct labor and overhead costs directly attributable to that product, and it should also include a portion of the administrative costs necessary to produce the product. With ABC, the cost allocations are not based on usage of resources. Instead, they are based on activities performed and what those activities cost. ABC is much more detailed than traditional costing, because it uses many more cost pools, and each cost pool has its own cost driver. But it results in a more accurate cost for products.
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