Question

Why a smaller firm cannot use the activity-based costing and Why the ABC brings the greatest benefits in larger corporation? Give the reason.

Answer 1

Why a smaller firm cannot use the activity-based costing?

A smaller firm cannot use the activity-based costing due to followings reasons;

1. Activity-based costing is very complex method of overhead because it requires various steps in overhead allocation that is why such ABC method is not suitable for smaller firms.

2. ABC method is expensive and time consuming hence it will not be suitable for the smaller firms because these firms can not bear such higher costs and time.

3. ABC costing method is suitable in case of higher amount of overheads and we know that in case of smaller firms amount of overheads will be lower that is why such method is not suitable for smaller firms.

4. ABC methods is preferable in case of multiple & different products but in case of smaller firms we see that such firms deals in low number of products hence such method is not suitable for smaller firms.

5. In case of smaller firms, selection of cost drivers is not easy work hence it will not be suitable to use ABC method.

Why the ABC brings the greatest benefits in larger corporation?

ABC brings the greatest benefits in larger corporation due to followings reasons;

1. As we know that larger corporation always have higher portion of overheads in total costs that is why more accurate allocation of overheads is needed which can be done after using ABC method.

2. Larger corporation deals in multiple products hence for knowing more accurate cost of each products ABC method is preferable.

3. ABC method is very helpful in identifying insufficiency and for making proper solutions for such insufficiencies. Hence ABC method is useful in case of larger corporations.

4. This method is more useful for determining profit margin for each profits and larger corporations deals in various number of products that is why for knowing profit margin much accurately we need to adopt ABC method.

5. Activity-based costing helps management in focussing more on value additive activities which is higher desired in case of larger corporations.

6. ABC costing is helpful in better understanding of cost behaviour and we know that in case of larger corporations such cost bahaviour must be accurately understood etc.