Advantages and Disadvantages of an Activity Based Costing System

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advantages of an Activity Based Costing System:
The first and most important advantage is the accuracy in the process of costing with regards to the product line, the end-users of the product, the stock-keeping units employed by the management and the channel and category which streamline the flow of the product from the producer to the end user. This system better assists in the process of understanding the concept of overheadcosts i.e. the allocation of common business resources as they are used byspecific product lines and their relation to specific cost driver. The system is easy to understand and interpret is it is accessible, useable and practically implement able across all norms of business set-ups. This process uses unitary cost, or marginal cost as the computation base incontrast to the traditional cost accounting methods which employ total cost. The system works exceptionally well will quality improvement and up gradation programs e.g. Six Sigma This system is particularly helpful in identifying and ear-marking some of thematters business activities which are a burden or stress on the business i.e.wasteful or non value adding services.Page6 The system also works exceptionally with performance management systemswhich are employed by most human resource departments in contemporary businesses. This process allows companies to implement costing strategies across another diagonal of the firm as business processes, supply chains and value additionchannels are ably and optimally analyzed in this process. This system mimics the actual business process as the appropriation of common pool resources takes place in the same way as common resources are used in the business. This system aids in the process of benchmarking which is an integral part of hequality control system. Disadvantages of an Activity Based Costing System:

Data collection process for this system is very time consuming• The capital expenditure on the activity based system and its subsequent...
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