Question

- Activity-Based Costing Define activity-based costing (ABC) systems. What benefits does implementing an ABC system bring to the company? Explain at least two benefits. What are the disadvantages to implementing an ABC system? List and explain at least two. Would the proposed changes make ABC a universally applicable costing method in your opinion? Why or why not? Elaborate your response.

No plagiarised answer, please.

Answer 1

Activity Based Costing:

Activity based costing method is an improved technique of allocation of overheads to products or services. It allocates cost based on activities consumed rather than traditional methods like labor hour or machine hour which does not accurately allocate costs. The traditional measures like labor and machine hour are not realistic since all the costs are not driven by them. Hence ABC method is an improved and more reliable way of allocating overhead costs.

Advantages:

· It helps in accurate product costing and taking reliable decision making like continue or discontinue of products or services, bidding for jobs, product pricing, etc

· It helps in better cost management through cost control and cost reduction. It helps in analysing all the activities and elimination of non value adding activity and thereby improving process efficiency.

Disadvantages:

· ABC costing method is time consuming since it needs identification of activities and calculating activity cost driver rates. Hence management needs to invest time and efforts in the same

· ABC method is not useful if cost is more than benefits involved in implementing it. ABC method is not useful when there are no multiple cost drivers driving the costs of products or services.

ABC method is regarded as a universally accepted costing method since they allocate cost accurately and have helped the organisation in making reliable decision making. ABC method has helped the firms in gaining competitive advantage for product costing and pricing and winning in the market place.