Question

. Explain how work the Activity-Based Costing (ABC), what is the challenge and how we can resolve it?                                                                                                                          

Answer 1

Activity based cost is more newer and a better approach over the traditional approach.

Where the traditional approach is used to calculate the cost of products by allocating all the cost based on labour hours as a "common unit of measure", whereas Activity based cost uses the approach for specific Costing, where all the specific costs being incurred on the Input parts are allocated based on the basis of its Occurence.

Some of the Challenges faced in using the Activity based Approach are as follows

1) Analyzing and preparing the Cost allocation Data can be bit time consuming and lengthy processs , resulting in wastage of time as well as money .

2)Data collected may not be very useful for small business houses where the operational cost is aleeady very low.

3) Some Costs may be diificult to assign , for eg Salary being paid to supervisors who working on an overall project where it would become diificult to allocate the cost on basis of Products.

4)In ABC Costs,Costs are treated based on fixed costs as if they were variable resulting in accurate understanding of the decision making.

How to Resolve the Challenges faced in ABC Costing-

Business houses with bigger operating costs should use this approach for a better understanding on allocation of specific Costs along with increase in savings of time and cost incurred .On the other hand , smaller bsiness houses should use traditional approach , which would a cheaper approach for cost allocation.

Fixed Cost should be treated as Sunk cost , and should not form part of decision making by alocating it to the specific costs being incurred.