Question

Explain three

(3) advantages in using activity based costing system

for a manufacturing

company.

Answer 1

ABC or Activity Based Costing is a method of costing in which the costs are allocated or assigned to the product using multiple or more than one cost driver.

Benefit of ABC costing -

Accuracy

Activity Based Costing brings accuracy in determination and allocations of cost to product by having cause and effect relationship. Accuracy helps business to have better control over the costs which are flowing into the final product.

Locating overhead costs

In traditional costing it was challenge to trace overhead cost of one particular product, hence it would not help management in their decision making, and also management will need to invest more time to find the exact cause for tracing the overhead costs. Activity Based Costing helps management to trace the Overheads Costs easily.

Improved Decision making

Since Activity Based Costing provides data on not just only on movements of costs but also the cause for changes, using the readily available data management can take decision on fixing the selling price of a product and can also use for having future Budgets.