In: Accounting
Why is ABC usually considered more accurate than traditional costing methods?
The answer to the above mentioned question is below in form of an image :-
Simply put, ABC is not the answer for all companies; but sometime, it is.
First, let’s be clear, traditional accounting is not an option. It is a requirement imposed by GAAP, investors, financial reporting, and a myriad of other accounting rules and regulations. It is not a choice! Still, it may be the only accounting tool a company needs. It can be just as accurate as ABC if product complexity and variety are limited. A company weighted toward manufacturing and labor, with little overhead, already knows the cost and profit connected with its offerings. It doesn’t need ABC to tell them what it knows, and any ABC implementation would be a waste of time and resources.
Product complexity and variety should lead a company to ABC. Because it uses consumption and/or transactional drivers to assign cost to activities, it is a more accurate reflection of product and customer profitability. In this instance, implementing ABC is a distinct competitive advantage as it leads to better decision-making and a strong link between strategy and operations. Accuracy, in any accounting tool, is a function of the software, the implementation plan and chosen drivers. Under the right ciscumstances, ABC can be a huge win.