Nowadays, global competition is driving the business towards restoration in order to strengthen their position in the global economy. The attention focuses on product quality, processes for the production, and improving workforce. However, many companies are still using the same traditional costing systems, Cooper and Kaplan (1991).The absorption costing paved way due to the lack of visibility for indirect costs so the ABC has been adopted by many organizations rapidly.
According to Krajnc et al. (2011), the main difference of ABC to absorption costing lies on how they treat indirect production costs (overheads) and sales. The fundamental goal of ABC is to identify as much as possible direct relationships between products and resources consumed through activities conducted from production to disposal.
The ABC system is based on the assumption that the support activities such as activities and sales, the cost of which traditional systems characterized as overheads, offer opportunities for the implementation of activities, and thus are not just for sharing costs. In an absorption costing when the volume of overheads is larger, the likelihood of distortions in reported costs is also greater. In general, overheads that exceed 15 percent of the total cost can cause inaccuracies, Turney (1996). Many companies had major problems by these inaccuracies and so they started using ABC.
The traditional approach to cost allocation consists of three steps:
Concentration of costs in the productive and non - productive parts.
Allocation of the cost of non-productive segments in section production.
Distribution of the resulting costs of production in the department products, services and customers.
The costs resulting from the traditional approach suffers from imperfections and this may lead to erroneous costs and taking non rational decisions. For example, traditional costing