Question

Google generates much of its revenue by providing online advertising. It is said that: “Activity-based-costing is only useful for manufacturing companies?” Is this a true statement?

Answer 1

Answer

I do not agree with the statement "Activity-based costing is only useful for manufacturingcompanies" because it can be applied in service industries too. In manufacturing companies,marketing, selling, distribution, service research and development and general administrationfunctions have signi±cant expense categories in which ABC is useful.

In service companies, ABC is useful in determining the selling costs (advertising, customerservice) and administrative costs (executive salaries, accounting, research and development). Ithas turned out to be progressively essential for organizations whose business sectors are turningout to be more competitive. Since ABC is about cost management, using it allows servicecompanies to reduce and control their costs in order to make correct pricing and other decisions,and to increase their pro±tability. Due to emerging of new competition, there has been aconsiderable change in services and other sector.

Hence, ABC is still developing. It has a lot of advantages over the traditional methods. It assignsthe cost of those activities only to the products that are actually demanding the activities. It is amore illustrative distribution of resource used as the costs allocation are based on the direct costdrivers inbuilt in each of the work activities that make up the organizational structure.