Question

if you owned a small manufacturing company with relatively high volume and multiple product lines would you implement an activity based costing model and why?

Answer 1

Activity based cost model is a method where overheads are logically assigned to the products or services.Such allocation of costs is based on the activities that is the cause of the overhead.Subsequenty such activity costs are assigned to the product that demands the perforamce of the activity.

Under the traditional method of overhead allocation will be high to high volume products and low to low volume products. This is because more labour hours are used up to produce high volume products. In the activity based cost model, without considering the organization structure it allows determination of cost associated to each product or service.

In the given scenario it is said that there is high volume and multiple product line. This implies that there will be number of actitivies in the process. By adopting the activity based cost model each of those activites can be identified and the respective activity cost could be attributed to the relevant product. When these costs are clearly identified to the product there is higher accuracy which helps in product pricing decision. This method will also help in mitigating non value adding activities visible thereby reducing the costs. Therefore , in the given scenario it would be prudent to adopt activity based cost model.