Distinction Between Traditional Absorption Costing and Activity Based Costing

	Traditional Absorption Costing			Activity Based Costing
Overheads are first related to departments cost centers (Production and Service Cost Centers)	Overheads are first related to activities or grouped into Cost Pools.
Only two types of activities viz. Unit Level Activities and Facility Level Activities are identified.	All levels of activities in the manufacturing cost hierarchy viz. Unit Level, Batch Level, Product Level and Facility Level are identified.
This method relates overheads to cost centers i.e. locations. It is not realistic of the behavior of costs.	This method relates overheads to the causal factor i.e. driver. Thus, it is more realistic of cost behavior.
Overhead Rates can be used to ascertain cost of products only.	Activity Cost Driver Rates can be used to ascertain cost of products and also cost of other cost objects such as customer segments, distribution channels. etc.

We can summaries the main difference between ABC and traditional costing by following picture:

Traditional allocation method