How do managers use the concepts of activity-based costing to add value to their organizations and...

How do managers use the concepts of activity-based costing to add value to their organizations and what types of strategic decisions can be made using activity-based costing? Why do you believe these concepts make the organization more efficient and effective?

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Expert Solution

Managers use ABC costing to identify the activities driving overhead costs to their products. They are able to analyze the relationship between each driver with the cost. Hence, they are able to control the overhead costs which are controllable.

Strategic decisions can be made using activity-based costing:-

1. Identification of efficiencies and maximize cost-effectiveness for projects.

2. Accuracy in the pricing of products by assigning the overheads on the basis of the actual use of overhead cost activities.

3. Determination of value-added and non-value added activities.

These concepts make the organization more efficient and effective by providing a more accurate representation of how costs flow through the organization to individual products and services. Expensive cost drivers are used as efficiently. Many times substitutes are also identified which helps in lowering the cost of production. Also, any non-value-added activities are eliminated because customers are unwilling to pay for them.

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