Admittedly, many people dislike change. Thus, the popularity of the traditional costing accounting method still persists until today. The following will explain in detail the many advantages and disadvantages of using the new costing accounting method called Activity Based Costing when contrasted and compared with the Traditional Cost accounting method.Many companies in the United States have shifted from to Activity Based Costing. The prior costing method normally used is the traditional based costing. However, the Activity based costing uses several pre -determined cost drivers that include materials bought to service the customers. In addition, the new activity based costing method is better than the traditional costing method because this new costing method distributes the total estimated cost of service organisation using the daily service activities (Caplan et al., 2005. p1).
Furthermore, Activity based costing is a better costing method as compared to the traditional costing method if the service organisation has many different products to market. In a nutshell, activity based costing is better than the traditional method of allocating total costs because it uses activities as the stepping stone to reach the main purpose of setting up a business which is to generate profits. Finally, activity based costing is a preferred choice because it does not stop its tracks after it manages costs (Krumwiede &. Roth, 2004. p 1).
The prior costing method normally used is the traditional based costing. There are main features for service organizations in both the United States and the United Kingdom that differentiate it from the traditional method of accounting. One of the main features that distinguishes it as a better costing method is that it has many cost cools unlike the traditional costing method. The traditional costing method normally uses only one or two cost pools. The most popular cost pool under the traditional costing method is that total cost is divided by the total number of hours to arrive at a per hour rate. Then the actual number of hours spent for servicing a specific customer service order is multiplied by the pre -determined hourly customer service rate to arrive at the actual cost (Hussein, 2004. p 1).
However, the Activity based costing uses several pre -determined cost drivers that include materials bought to service the customers. Also, the number of machine set ups used to repair a car in a car repair centre is one cost driver that that has made this costing method a success. In addition, the number of inspections that have been done in order to determine if the repair shop employees are doing their jobs to comply with the minimum benchmark in terms of job cost and quality is another cost driver that puts activity based costing in high demand. This is also used in the traditional cost accounting method (Lewis, 1993. p. 1).
In addition, the new activity based costing method is