Question

Some Accountants have argued that Activity Based Costing will be of limited benefit if the overhead costs are primarily volume related or if the overhead is a small proportion of the overall cost. What do you think?

Answer 1

Activity Based Costing(ABC)

It is a technique which involves identification of cost with each cost driving activity and making it a basis for assignment of overhead costs over different cost objects such as jobs, products and customer services. It is the one method where the cost is classified on the basis of activity. The technique of ABC stresses the importance of different costs for different activities. For exampile , all the costs associated with purchase of rawmaterials, store and spares will be inculded in the purchase activity pool.

Other than manufacturing organisations,Activity based costing will be of limited benefit if the overhead limits are primarly volume related or if the overhead is a small proportion of the overall cost.

In the case of manufacturing organisation Activity based costing produces more and more benefits some of them are;

1) production overheads are high in relation to direct costs

2) Great diversity in the product range

3) products use different amount of overhead resources.

It is time consuming, deep knowledge is required for it's preparation and it is short term oriented are the disadvantages of activity based costing.

So it is clear from the study that, In manufacturing organisation it is has been playing a vital role and have wide scope whereas in the case of other organisation it is a complexity task with limited scope.