BAR Cost Accounting · Updated November 2026
Activity-Based Costing: Why Can Traditional Overhead Allocation Distort Product Costs?
ABC attempts to trace overhead using the activities that actually cause costs instead of relying only on broad volume drivers.
Traditional costing
Overhead may be allocated using direct labor hours, machine hours, or another broad volume-based driver.
Activity-based costing
ABC creates multiple activity cost pools and cost drivers to trace overhead more closely to cost-causing activities.
Why distortion happens
A low-volume complex product can consume many setups, inspections, and engineering changes even when its unit volume is small.
Decision use
More precise product costs can improve pricing, product mix, process improvement, and customer analysis.
The takeaway
Traditional costing asks how much volume was produced. ABC asks which activities the product consumed.
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FAQ
Does ABC eliminate all overhead allocation?
No.
Can ABC create more cost pools?
Yes.
Is ABC always cheaper to operate?
No.