Question

Discuss the advantages of implementing ABC costing. Please cite specific examples in your post, sharing what you learned with the rest of the class. How can you utilize the principles of ABC costing in your workplace or home?

Answer 1

Answers

• It provides accurate and most reliable cost informantion:- In ABC techniques overheads are allocated using cost drivers of each activity, so we can accuratly allocate the cost to overhead as per the cost consumption using cost drivers

Eg: In a manufacturing company, machine setup cost is cost pool and machine run is the correspondig cost driver which drives the cost.

• Enhance decission making - since the managers are available of relaible cost data they can easily understand cost and thisk will quick the decission making.
• It provides much better insight into what drives cost.
• ABC recognises the complexity of the product with its multiple cost drivers.

ABC can be implemented in following steps:

1. Identify major activities. ie machine setup cost, material handling cost etc
2. Use cost allocation and apportionment method to charge overhead cost to each of these activities. ie cost pool
3. Identify cost drivers, ie machine run, number of orders etc
4. calculate absorption rate per unit of cost driver.
5. Charge overhead based on consumption of activities