Question

What are the top four advantages to activity based costing?

I am looking for an expert solution to Management Accounting by Atkinson , Kaplan, Matsumara, Young. Chapter 5 -31 a - d.

Answer 1

advantages of activitiy based costing

1. Accurate Product Cost:

ABC brings accuracy and reliability in product cost determination by focusing on cause and effect relationship in the cost incurrence. It recognises that it is activities which cause costs, not products and it is product which consume activities. In advanced manufacturing environment and technology where support functions overheads constitute a large share of total costs, ABC provides more realistic product costs.

ABC produces reliable and correct product cost data in case of greater diversity among the products manufactured such as low-volume products, high-volume products where as Traditional costing system is likely to bring errors and approximation in product cost determination due to using arbitrary apportionment and absorption methods.

2. Tracing of Activities for the Cost Object:

ABC uses multiple cost drivers, many of which are transaction based rather than product volume. Further, ABC is concerned with all activities within and beyond the factory to trace more overheads to the products.

3. Tracing of Overhead Costs:

ABC traces costs to areas of managerial responsibility, processes, customers, departments besides the product costs.

4. Use of Excess Capacity and Cost Reduction:

ABC, through the processes of pooling of activity costs and the identification of cost drivers, can lead to a range of applications. These include the identification of spare capacity and the fostering of cost reduction by comparing the resources required under ABC with the resources that are currently provided. This provides a platform for the development of activity-based budgeting in which the resource relationships identified by ABC are used to project future resource requirements