Question

As a cost accountant of a company that manufactures a single product, would you advise your company to adopt an ABC system? Why or why not? Explain. .

Answer 1

Activity based costing is an accounting methodology that assign cost to activities rather than product or service. This enable resources and overhead costs to be more accurately assigned to products and services rather than consume them. ABC assigns cost to activities based on their use of resources and then assign cost to the cost objects.

Need for ABC are

1)Production overhead are high in relation to direct costs.

2)There is a great diversity in product ranges.

3) Product use different amount of overhead resources.

4) Consumption of overhead resources is not primarily driven by volume or hours.

Company that manufacture a single product may go for traditional absorbtion costing instead of ABC, as it is producing only one product.Overhead cost will be consumed by only one product, even though there may be different activities. If the existing traditional cost accounting system provide the accurate cost information to know the product cost, there is no need of Activity Based Costing.

Conclusion : It is advisable for the company to implement ABC where there are large variety of products and use different amount of activities. So in this case company produce only one product as it should not go for Activity Based Costing.