Differentiate between traditional accounting and activity-based costing (ABC)

Traditional costing uses one fixed rate for all overhead costs, while Activity-Based Costing (ABC) breaks it down into different rates for various activities. ABC is like looking at the specific things that really cost money, while traditional costing is a more general approach with just one rate for everything.

Let's use a Snack Company as an example:        

Traditional Costing at Tasty Treats: At Tasty Treats, they might figure out how much it costs to make each snack based mainly on the time it takes to prepare them. So, if one snack takes longer to make, it gets charged more for the overall costs, even if time isn't the only thing that matters.

Activity-Based Costing (ABC) at Tasty Treats: Now, with ABC at Tasty Treats, they look at each snack more closely. They realize that some snacks need extra steps like special flavors or shapes, which means extra costs. ABC helps Tasty Treats assign costs more accurately based on the specific things each snack needs, giving a better idea of how much each one truly costs to make.