Question

Explain why activity-based costing is becoming more popular.

Answer 1

Activity-based costing (ABC) is a technique for assigning costs to products or services based on the resources that they expend.

ABC is an other option to traditional accounting in which a business' overheads (indirect costs, for example, lighting, warming and showcasing) are allocated in proportion to an activity's direct costs. This is unsatisfactory in light of the fact that two exercises that absorb the same direct costs can utilize altogether different measures of overhead. A mass-created modern robot, for example, can utilize a similar measure of labor and materials as a customized robot. Be that as it may, the customized robot utilizes undeniably of the organization architects' chance (an overhead) than does the mass-created one.

This distinction would not be reflected in traditional costing systems. Henceforth an organization that makes more and more customized products (and bases it's estimating on historic costing) can before long wind up making extensive misfortunes. As new innovations make it simpler for firms to redo products, the importance of assigning indirect costs precisely increments.