Question

"Activity-based costing is the wave of the present and the future. All companies should adopt it." Do you agree? Explain.

Answer 1

Solution:

Not agree with the statement because ,Activity based costing is the wave of the present and the future,It helps in cost control and decision making .But only manufacturing companies should adopt it.

Activity based costing is a technique which involves identification of costs with each cost driving activity and making it a basis for apportionment of overhead costs over different cost objects such as jobs , products and customer services.It is a one method where the cost is classified on the basis of activity.It aims to stresses the importance of different costs for different activities.For example , all the costs associated with the purchase of raw materials,stores and spares will be included in the purchase activity pool.This is the way we can explain activity based costing.

It has been clear from the analysis that different activities are mainly made at manufacturing industries , It will be more applicable in such industries.Apart from that man organisation need activity based costing for product costing where:

1) Production overheads are high in relation to direct costs

2)There is great diversity in the product range

3)Product is different amount of overhead resources

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