Question

Discuss the advantages and disadvantages of activity-based costing [ABC] as compared to more traditional costing methods. Include your opinion as to whether or not the cost-benefit trade-off of ABC supports the use of it or not.

Answer 1

Following are the main advantages and disadvantages of activity-based costing [ABC] as compared to more traditional costing methods;

Advantages are as follow;

1. Under activity-based costing [ABC], product cost is determined more accurately in compare to other traditional methods.

2. Overhead allocation is much accurate under ABC costing system.

3. Selling price of multi-products are fixed more accurately & more fairly under activity-based costing (ABC) because overheads are allocated more accurately.

4. This is based on unit cost in compare to total cost hence this looks more fair method.

5. ABC method provides more relevant information to management for better decision making.

6. Controlling & management of overheads is more accurate under ABC method.

7. Sufficient information can be obtained about cost behaviour.

8. It is helpful in reduction in cost.

9. Overheads are more accurately traceable under this method.

10. This method facililates benchmarking.

Disadvantages are as follow;

1. It is very difficult to identify all relevant activities that are the point of costs.

2. Selection of cost driver is also another major challenge under this ABC method.

3. For small firm, this method is not suitable because it is complex method.

4. This method is very expensive so it will required higher costs and also need trained human resources.

5. Some time interpretation & decision making on the basis of ABC system’s information becomes more confusing & complex hence this method may lead to some problems.

So on the basis of above advantages & Disadvantages, it is clear that ABC cost methos should be adopted by the firms because it will generate various types advantages and it will also bring operational efficiencies. Hence we can say that inspite of some limitations firms should follow ABC costing system and should try to manage supporting system which help in proper functioning of this ABC costing system.