Define activity-based costing (ABC) systems. What benefits does implementing an ABC system bring to a company?...

Define activity-based costing (ABC) systems. What benefits does implementing an ABC system bring to a company? Explain at least two benefits. What are the disadvantages of implementing an ABC system? List and explain at least two. Would the proposed changes make ABC a universally applicable costing method in your opinion? Why or why not? Elaborate your response.

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Expert Solution

Activity based costing (ABC) is an approach for allocating the production cost to the material produced by an entity. To be able to use ABC method of costing, the entity needs to identify the activities involved in manufacturing the product. Based on this identification, the overall cost of that activity is allocated to the produced units of the material on a prorata basis. For example, an activity of product testing costs the company 1000$. This activity is to be performed for product A and B. The company has 4 products in its portfolio (A, B, C and D). Based on this information, the testing cost will be allocated only to products A & B in proportion to the units produced for these products. If A unit is 60 and B unit is 40, the cost allocated to A product will be 600$ and on B product will be 400$.

Benefit of ABC:

1. Fair allocation of actual cost of manufacturing to the product.

2. The pricing of the product can be done accurately and competatively, if the cost allocation is correct.

Disadvantages of ABC:

1. ABC is not useful for companies who work on a small scale with not much overheads.

2. ABC is not useful for companies who do not have different product types which incur different cost and require different pricing strategies.

There is no information regarding the proposed changes to the ABC costing approach, hence I am not able to answer this further. ABC is a worldwide used costing technique which helps the organizations to allocate there overhead costs in a fair and transparent manner and helps in pricing the products based on actual cost of manufacturing the product. It has its advantages and disadvantages as mentioned above and the company should use it based on its requirements.

ekkarill92 answered 1 year ago

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