Activity-based Costing is one of the cost accounting strategies. Discuss the ABC system and the main...

Activity-based Costing is one of the cost accounting strategies. Discuss the ABC system and the main differences between the traditional costing and the ABC systems.

Expert Solution

Activity-Based Costing (ABC) is a system that focuses on activities as the fundamental cost objects and uses the

cost of these activities for computing the costs of products. There are several reasons why managers are preferring

ABC to traditional system.

(i) In the traditional system cost analysis is done by product. In ABC managers focus attention on activities rather

than products because activities in various departments may be combined and costs of similar activities

ascertained, e.g. quality control, handling of materials, repairs to machines etc. If detailed costs are kept by

activities, the total company costs for each activity can be obtained, analysed, planned and controlled.

(ii) Managers manage activities and not products. Changes in activities lead to changes in costs. Therefore, if

the activities are managed well, costs will fall and resulting products will be more competitive.

jeff jeffy answered 1 year ago

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