Difference between activity based costing and job costing?

Answer 1

Activity Based Costing (ABC) is one of several approaches to job costing. Traditionally, job costing has been measured by allocating all direct costs associated with a certain job as well as 'a fair share' (usually based on direct labour hours or volume) of the total indirect costs/overheads incurred across all product lines. This traditional approach was appropriate to production that was labour-intensive, attracted a low level of overheads and enjoyed a fairly uncompetitive market. In more modern times however, production is increasingly machine-driven, overheads are higher (due to more rapid depreciation of equipment, maintenance and electricity costs) and products compete in a global market. Activity Based Costing seeks to identify the causes (or drivers) of indirect costs and apply them more selectively to particular 'activities'. This means that product lines which are simple and quick to make in large quantities will be 'costed' more competitively, only including overhead costs 'caused' by that particular job; while smaller more specialised product lines will be costed at a higher rate. Under a traditional job costing approach which allocates overheads in proportion to volume, the simple product line producing large quanities would have attracted a far greater share of the indirect costs making it less competitive in the marketplace.