Final answer:
Activity Based Costing (ABC) differs from traditional costing systems in the way indirect costs are treated, using multiple cost drivers for more precise allocation.
Step-by-step explanation:
The Activity Based Costing (ABC) system differs from traditional costing systems in the treatment of indirect costs. The traditional costing system typically allocates indirect costs to products based on a single, volume-based cost driver, such as direct labor hours.
However, ABC uses multiple cost drivers to allocate indirect costs more accurately to products based on the actual activities that incur costs. Direct labor and direct material costs are typically variable costs, which change with the level of output. These costs are treated similarly in both traditional and ABC costing methods. In contrast, indirect costs, which include utilities, rent, and salaries for managers, can be allocated more precisely under the ABC method to reflect the consumption of resources by different products or services. Therefore, ABC can provide more accurate product costing, especially for companies with diverse products and complex processes.