Define Activity Based Costing. What are the pros and cons of this costing method? If identify...

Define Activity Based Costing. What are the pros and cons of this costing method? If identify and discuss an industry best suited for this costing method.

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Activity Based Costing is a system that focuses on activities as the fundamental cost objects and uses the cost of these activities for compiling the costs of products and other cost objects. According to Peter B B Turney , Activity Based Costing is defined as the method of measuring the cost and performance of activities and cost objects.

Advantages of Activity Based costing are:

*More accurate product cost information by reducing arbitrary cost

*improves quality of information available for decision making

*Easy for overhead allocation

*Helps in elimination of unwanted overhead cost

*Helps to identify the activites that can be eliminated

*Helps in segregation of value added and non value added activities

*Easy to understand

Disadvantages

*Time consuming in data collection

*cost of implementation and cost of maintaing are high

*cost driver and cost can not be established easily

*Doesnot follow GAAP at certain areas

Activity based costing is best suitable for Manufacturing industry where a product is manufactured using two or more activities

ekkarill92 answered 1 year ago

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