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Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods. Traditional costing is more simplistic and less accurate than ABC, and typically assigns overhead costs to products based on an arbitrary average rate. ABC is more complex and more accurate than traditional costing. This method first assigns indirect costs to activities and then assigns the costs to products based on the products’ usage of the activities.
in traditional costing, indirect costs (overheads) are simply gathered in one cost pool, and allocated to different products using one simple cost driver (labor or machine hours as an example)
ABC came as an enhancement to traditional costing, in ABC you use different cost pools, each activity in the production process has it's cost pool, and overheads are allocated to these cost pools using relevant (cost driver) for each, then the costs in each cost pool is allocated to various products on base of it's actual use of this activity (activity drivers),
so products use activities, activities use resources
it's more accurate than just simply allocating cost of resources directly to products on base of one cost drievr,
and it leads into better decision making.
