Question

What makes

(A) Activity-Based Costing better than Volume-Based Costing,

(B) Activity-Based Costing with Practical Capacity better than Activity-Based Costing without Practical Capacity,

and

(C) When should management refer to these costing methods?

Answer 1

(A).

Yes it is true that activity-based costing is better than volume-based costing because in case of volume based costing total overheads & indirect costs are allocated on a overall simple rates but these overhead allocation rate does not provide accurate cost information. In other words we can say that activity based costing system is more systematic and gives more accurate information about cost per unit hence activity based costing is better than volume-based costing.

(B).

Yes, it is true that activity-based costing with practical capacity is better than activity-based costing without practical capacity because in case of using practical capacity is base for activity-based costing we will get more accurate cost per unit. Practical capacity gives us idea about actual capacity used in production process hence it will help in actual allocation of indirect costs & overhead costs. Thus it is clear that activity-based costing with practical capacity is better in compare to other.

(C).

In case of simple production process, management can adopt volume based costing system because it will save time and efforts. Apart from this in case of volume-based costing there will be low cost for adopting this method of cost allocation.

But sometime management has to adopt activity-based costing system because in case of complexity in production process, management should adopt ABC system because it will generate more accurate data about cost. Apart from this large level companies also need to adopt this ABC costing system because these companies have trained & experienced employees to handle this modern costing system.

Thus we can say that implementation of activity-based costing system and volume-based costing system depends on various factors.