As such, the company was also using the same method to calculate the cost incurred thereof. But, conceptually thinking of traditional costing methods brings about many errors in the modern era and therefore raises many doubts regarding its effectiveness in this changing module. There are numerous variables that add upon the cost structure of a manufacturing company rather than only labour or machine cost e.g. advertisement, customer, raw materials, and few others. Moreover, the traditional costing method applies a volume based allocation which often proves to be inappropriate in the modern market assuming something which is not adhered to the actual causes of costing (Averkamp, n.d.).
But to take any kind of management decision regarding costs, the information about accurate product costs, resource allocations and many other variables is very significant part. Here the traditional method fails to work with accuracy and therefore has a very minimum contribution in managerial decision making. In this context the growing applicability of Activity-based method is non-negligible, as it emphasises on almost every aspects that traditional methods do not. Activity-based Costing Method assumes that cost variables causes demand for activities, which in turn causes expenditure, unlike the traditional method that assumes only variable cost as reasons of expenditure. Moreover it proves to be more accurate than traditional method in calculating the overhead costs of a product (Minbiole, 1998).
Numerically, according to the traditional method, if the total overhead cost is $ 1, 00,000 and the total direct labour dollars comes to a figure of $ 1, 20, 000, the overhead cost per direct labour comes to be $ 0.83, (i.e. $ 1, 00, 000/$ 1, 20, 000). Again assuming the per unit labour cost to be $ 0.387, the overhead cost will stand at the figure of $ 0.32.
In the case of Activity-based calculation,