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In: Accounting

For this discussion: Analyze the advantages and disadvantages of implementing a traditional Activity-Based Costing (ABC). Provide...

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.

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Expert Solution

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.


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