In: Accounting
For this discussion: Analyze the advantages and disadvantages of implementing a traditional Activity-Based Costing (ABC). Provide a rationale for your response, including a discussion of how a company would benefit from analyzing costs using an ABC system. Suggest the way a business can achieve a competitive advantage in the marketplace through the use of ABC. Provide two (2) reasons to convince senior management that they should implement an ABC system.
Advantages and Demerits of Activity Based Costing (ABC)
Accurate Product Cost:
Information about Cost Behaviour:
Tracing of Activities for the Cost Object:
Tracing of Overhead Costs:
Better Decision Making:
Cost Management:
Use of Excess Capacity and Cost Reduction:
Benefit to Service Industry
The following are the demerits of ABC:
1. Expensive and Complex
2. Selection of Drivers:
3. Disadvantages to Smaller Firms:
4. Measurement Difficulties:
“Activity-based costing plays an important role in companies’ strategies and long-range plans to develop a competitive cost advantage. While activity-based costing focuses attention on activities in allocating overhead costs to products, activity-based management focuses on managing activities to reduce costs. Cost reduction generally requires a change in activities. Top management can send notices to company employees to reduce costs, but the implementation requires a change in activities.