Question

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.

Answer 1

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