The term Activity Based Costing is utilized by mangers in the company mainly for the purpose of making decisions and creating reports. This cost is not included in the financial report prepared externally but is still essential to know the cost involved based on activities. The activity based costing helps in assigning cost to the products which are being manufactured by different types of activities.
This kind of costing is completely different from traditional costing systems. This is because of the fact that traditional cost only takes care of manufacturing cost. Also in traditional costing involved in the warranty of the product and the expense occurring in repair are not accounted. In activity based costing all these kind of cost can be included which gives a better idea of the product.
The way overhead cost is assigned with respect to objects keeps the activity based costing system different from traditional costing methods. In activity based costing separate costing calculations are done based on activities rather than by making estimate on total overhead cost as in traditional costing. This helps companies to calculate cost which are involved in the setting up of new machinery and product design activities.