The difference between the traditional costing method and Activity-Based Costing (ABC) is that under ABC, manufacturing overheads are allocated based on multiple activity drivers; under the traditional costing method, manufacturing overheads are primarily allocated using a single allocation base. Traditional costing methods collect indirect costs by department, while Activity-Based Costing collects indirect costs by activity. Compared to traditional costing methods, Activity-Based Costing is not conducive to implementing responsibility accounting and performance evaluation.

Under the traditional costing method, products are the objects of cost allocation, and the proportion of a certain resource consumed per unit of product to the total consumption of that type of resource in the current period (e.g., labor hours, machine hours) serves as the basis for allocating all indirect manufacturing costs, which is cost-on-cost accounting. In a high-tech environment, the amount and importance of the "manufacturing overhead" portion of product costs have significantly increased. Meanwhile, the occurrence of manufacturing overheads is becoming less and less correlated with traditional cost allocation bases such as direct labor costs, machine hours, and direct labor hours. If manufacturing overheads are still allocated according to the original single standard, the resulting cost accounting information will inevitably be distorted, and severe distortion of this cost information can even lead to erroneous business decisions.

Activity-Based Costing not only significantly improves the accuracy of cost calculation results but also guides business managers to pay close attention to cost drivers, thereby overcoming the shortcomings of unclear responsibility for indirect costs in traditional costing methods. This enables many uncontrollable indirect costs under traditional costing methods to find relevant responsible parties in the new accounting system and apply necessary cost controls. With the application and promotion of Activity-Based Costing in management, activity-based cost information is widely used in budget management (e.g., Activity-Based Budgeting, i.e., ABB), inventory valuation, product pricing, new product development, product portfolio decisions, make-or-buy decisions, customer profitability analysis, and performance evaluation, thus becoming the core and foundation of strategic cost management.

Differences in the Scope of Indirect Costs

Under the traditional costing method, indirect costs refer to manufacturing costs, which, in terms of economic content, only include costs directly or indirectly related to product production, while expenditures for managing and organizing factory-wide production, selling products, and raising production funds are treated as period costs. Under Activity-Based Costing, product costs are full costs; all costs, as long as they are reasonable and effective, are expenditures beneficial to the ultimate enterprise value and should be included in production costs. It emphasizes the reasonableness and effectiveness of expenditures, regardless of whether they are directly or indirectly related to production. In this case, period costs collect all unreasonable and ineffective expenditures.

Differences in Information Accuracy

The main purpose of traditional costing methods in calculating costs is to allocate manufacturing overheads collected by auxiliary departments to various products in an average linear manner, without considering the matching problem between product consumption and costs in actual production; it can only be "absolutely inaccurate" information. Product cost information calculated by Activity-Based Costing can be regarded as relatively accurate information. When Activity-Based Costing allocates indirect costs, it focuses on the source of expenses and costs, linking the allocation of indirect costs to the reasons for their generation. When allocating indirect costs, diverse allocation bases (cost drivers) are selected, greatly improving the traceability of costs and minimizing the proportion of indirect costs allocated by arbitrary standards, thereby improving the accuracy of cost information. If product costs are considered the bullseye, although Activity-Based Costing may not hit the bullseye every time, it can consistently hit the outer and middle rings of the target.

Differences in Production and Quality Management Methods

The production management system under traditional costing methods is a push-forward production system. That is, production starts from raw materials entering the production process, semi-finished products, after completing one process, move to the second production process, and so on, step by step, until the final finished product is formed. Consequently, traditional cost and quality management generally focuses on quality inspection of semi-finished and finished products, and when problems arise, they are promptly repaired or eliminated.

In contrast, the production management system under Activity-Based Costing is generally a Just-In-Time (JIT) production system. Unlike traditional production, it is a pull-based, backward-driven production system, where the enterprise's production processes are interlinked and tightly connected, improving work efficiency and profitability and also reducing costs associated with inventory for the enterprise. Quality management under Activity-Based Costing is a "cradle-to-grave" total quality management approach that requires workers at each production stage to control their own production, implement self-quality supervision, and immediately correct defective products within their respective production processes.

Differences in Allocation Base Characteristics

Traditional costing methods primarily use single financial variables such as labor hours as allocation bases, while ignoring a good set of non- financial variables, thereby losing some favorable opportunities to improve company management. The allocation basis of Activity-Based Costing is diversified, not only emphasizing financial variables such as labor hours, machine hours, production batch size, and the number of product components, but also non-financial variables such as process change orders, number of setup adjustments, and transportation distance. Using multiple allocation bases improves the relevance of products to their actual consumption costs and extends management to the activity level, to eliminate "non-value-added activities," improve "value-added activities," and increase "customer value."

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