A traditional costing system employs multiple allocation rates, but an activity-based costing system uses only one single allocation rate.

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A traditional costing system allocates overhead costs to products or services using multiple allocation rates based on certain predetermined criteria such as direct labor hours, machine hours or materials used. On the other hand, an activity-based costing system uses multiple activity cost pools and allocates costs based on the activities that drive the overhead costs. Therefore, an activity-based costing system does not use a single allocation rate, but rather multiple rates based on the different activities involved in the production process.

A Traditional Costing System Employs Multiple Allocation Rates, but an Activity-Based