Traditional vs. ABC Example

Jan 07, 2026

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This analysis contrasts traditional costing methods with Activity-Based Costing (ABC) for two products, "The Boot" and "The Club." It examines the estimated costs, including direct materials, direct labor, and overhead, highlighting key differences in applying overhead rates based on direct labor hours. The Boot, expecting 5,000 units, incurs direct material costs of $30 each, alongside labor at $12 per hour. In contrast, The Club, with an expected 25,000 units, has direct materials costing $40 and the same labor rate. The overhead rate under ABC is calculated against a projected cost of $900,000.

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Traditional vs. ABC Example

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Traditional vs. ABC Example
Data ( 2 products) The Boot The Club 5,000 units expected Direct material $ 30 1 hour Direct labor @ $12 per hour Overhead cost $ 30 per DLH • 25,000 units expected • Direct Materials $ 40 • 1 hour Direct labor @ $12 per hour • Overhead cost $ 30 per DLH Overhead rate applied on basis of Direct labor Hours(DLH)Rate based on $900,000 expected cost ÷ 30,000 DLH = $30 per DLH