Traditionally cost accountants had arbitrarily added a broad percentage of expenses onto the direct costs of products/services to allow for the costs. However as the percentages of indirect or overhead costs had risen, this technique became increasingly inaccurate because the indirect costs were not caused equally by all the products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another.

Consequently managers were making decisions based on inaccurate data especially where there are multiple products.

Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.

ABC is particularly relevant when:
	Activity is unrelated to physical volume
	Overheads are large in relation to direct costs
	High volume products subsidise low volume products

The table below compares the 2 methodologies: