Question

Assess this statement: "Activity-based costing is only useful for manufacturing companies". Do you agree or disagree, why? PLEASE provide example.

Please answer in more than 350 words and only in word format. Please dont copy paste from websites of course hero or any.

Answer 1

Activity-based costing is only useful for manufacturing companies:

This statement is not correct.

Initially the Activity-Based Costing has originated in manufacturing industries, but it is not restricted to manufacturing companies, many other businesses also use ABC costing technique.

Activity Based Costing is used to find the accurate proportion of fixed and other administrative expenses among various products or services where there is multiple product line for a company. It measures the costs per activity and each activity has a separate cost driver. It allocates activity costs to departments based on the department's utilization of activity cost drivers. Hence it is far better than the traditional overhead system of allocating the entire overhead based on a single measuring unit either direct labor hours or machine hours which is absurd.

It recognizes the relationship between cost, activities and products with the help of which it allocates costs.

Manufacturing companies use ABC costing mechanism when overhead costs are made a significant percentage of overall expenses of their products, and when there are varying product lines with different quantities.

It is also used in businesses like Construction, Healthcare and any specific instances too.

Construction has significant overhead costs which need to be observed under Activity Based Costing for better allocations.

Health Care is in need of such costing system to allocate its expenses in an accurate way.

Hope these points are helpful!!