A Comparative Study of Traditional and Activity-Based Costing Methods for Cost Allocation in Business Practices

Abstract

Allocating direct and indirect costs has remained a contentious issue in the field of management and cost accounting for several decades. Existing studies have identified two key techniques for allocating these two costing elements: traditional costing technique and secondly, activities-based costing technique. Therefore, it remains unclear whether the traditional-based costing technique is superior to the activity-based costing technique. The current study is thus poised to investigate a comparative study of traditional and activities-based costing techniques using some existing studies as research methods. In this current study, different research on existing studies on this topic in the literature were reviewed. Over ten peer-reviewed journals were downloaded, and the findings, conclusions, and recommendations were synchronized into the current study to unravel the current state of knowledge on comparison between traditional and activity-based costing techniques for allocating direct and indirect costs. Therefore, the study concluded that the activity-based costing method gives management more detailed, meticulous, accurate, worthwhile, and objective information in the decision-making process than the traditional costing method. It is therefore recommended that businesses should consider an activity-based costing technique in allocating the costs because of the inherent benefits it presents to business practices.