What is a disadvantage of traditional absorption costing when compared to activity-based costing?

Traditional absorption costing is primarily focused on allocating manufacturing overhead across products based on a predetermined rate, often relying on volume-based measures such as direct labor hours or machine hours. This method can overlook significant costs that arise from specific activities that may not correlate directly with production volume.

In contrast, activity-based costing (ABC) delves deeper into the different activities that contribute to overhead, allowing for a more accurate representation of costs associated with particular products or services. By not considering activities in the allocation of costs, traditional absorption costing may fail to identify and allocate relevant costs tied to specific processes or resources used, which could lead to misinformed pricing strategies and product profitability assessments.

In summary, the key disadvantage of traditional absorption costing is its potential to ignore costs related to activities, which can provide a distorted view of product costs and profitability when compared to the more nuanced approach of activity-based costing.