Brian O'Kane

Businesses rely on accurate cost information to set prices, manage budgets, and plan for growth. Two popular methods— activity-based costing (ABC) and traditional costing—offer distinct ways to allocate indirect expenses. Choosing the right approach depends on your company’s size, complexity, and strategic goals. Here’s a clear comparison to help you decide which costing method fits your needs. Understanding Activity-Based Costing Activity-based costing allocates overhead based on the specific activities that drive costs. Instead of spreading indirect expenses evenly, ABC breaks costs into activity pools—such as machine setups, inspections, and material handling—and assigns expenses according to each product’s actual use of those activities. This granular view helps managers: Identify high-cost processes and eliminate inefficiencies Price products more accurately by reflecting true resource consumption Make informed decisions about product mix and outsourcing For example, a manufactu...

Effective cost allocation is vital for businesses to maintain profitability, make informed decisions, and ensure the optimal use of resources. By distributing costs accurately, companies can gain a better understanding of their expenses and identify areas for improvement. Proper allocation methods enable companies to ensure that all financial data is accurately recorded, facilitating better pricing, budgeting, and overall financial management. This article will explore the most commonly used cost allocation methods and their importance in economic decision-making. Cost allocation involves assigning indirect costs (overhead) to different products, services, or departments. The primary goal is to distribute costs fairly based on the resources each product or service consumes. Inaccurate allocation can distort the financial picture, making it difficult for businesses to assess their profitability accurately. The choice of allocation method has a significant impact on the final costs; the...