Activity based costing
Strength of Activity Based Costing
The major strength of activity based costing is the ability to estimate the cost of individual products and services precisely. By transferring overhead costs to individual units of products or services, ABC helps identify inefficient or non-profitable products or activities that help into the profitability of efficient processes or highly profitable products.
1. More accurate costing of products/services
Product cost determination under activity-based costing is more accurate and reliable method of product or service costing because it focuses on the cause and effect linkage of costs and activities in the context of producing goods. This lead to more accurate pricing decision.
2. Controlling and monitoring activities
Control of overheads consisting of fixed and variable becomes possible by controlling and monitoring activities. Linkage between cost and activities are clearly identified in activity-based costing and thus provides opportunities to control overhead costs.
3. Making decision
Sufficient information can be obtained to make decisions about the profitability of different product lines.
4. Better ways of allocating and eliminating overheads
ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement and scorecards.
5. Better understanding overhead It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them.
Weaknesses Of activity Based Costing
The major weaknesses of activity based costing is that although activity based costing is a scientific approach, the method of implementation is complex, time consuming, and costly. The process of data collection and data entry requires substantial
The major strength of activity based costing is the ability to estimate the cost of individual products and services precisely. By transferring overhead costs to individual units of products or services, ABC helps identify inefficient or non-profitable products or activities that help into the profitability of efficient processes or highly profitable products.
1. More accurate costing of products/services
Product cost determination under activity-based costing is more accurate and reliable method of product or service costing because it focuses on the cause and effect linkage of costs and activities in the context of producing goods. This lead to more accurate pricing decision.
2. Controlling and monitoring activities
Control of overheads consisting of fixed and variable becomes possible by controlling and monitoring activities. Linkage between cost and activities are clearly identified in activity-based costing and thus provides opportunities to control overhead costs.
3. Making decision
Sufficient information can be obtained to make decisions about the profitability of different product lines.
4. Better ways of allocating and eliminating overheads
ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement and scorecards.
5. Better understanding overhead It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them.
Weaknesses Of activity Based Costing
The major weaknesses of activity based costing is that although activity based costing is a scientific approach, the method of implementation is complex, time consuming, and costly. The process of data collection and data entry requires substantial