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Activity Based Costing can Benefit Companies

Describe how Activity Based Costing can benefit companies. You may wish to give an example of a company where activity based costing could be applied. Describe in detail how this company could benefit from Activity based costing.

The following items will be evaluated in particular:

1. ability to identify the strengths and weaknesses of ABC
2. ability to discuss the differences between traditional product costing and ABC
3. Explain why the inclusion of fixed costs in the product will lead to poor internal decision making

Solution Preview

The following items will be evaluated in particular:

1. ability to identify the strengths and weaknesses of ABC

Activity based costing allocates the cost to the cost driver on the basis of activity rate.

Purpose of ABC
ABC assigns costs to products by tracing expenses to "activities". Each Product is charged based on the extent to which it used an activity. The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business. (XIMB, 2009)
Activity-Based Costing technique allows an organization to determine the actual cost associated with each product and service produced by the organization. Hence we can say that the primary objective is to make indirect costs meaningful so that they can be assigned to processes to determine how costs are incurred.
Benefits to the company
Cost Optimization
ABC helps in cost optimization by reducing the baseline costs of the business, while maintaining acceptable service levels.
Control wastage
ABC helps in controlling wastage such as idle inventory (Buffer stock, excess fabric), defected products, rejections & reworks, hidden costs - demurrage, human errors etc.
Basis of Activity based management (ABM)
Activity Based Management is using an ...

Solution Summary

The expert describes how activity based costing can benefit companies. The ability to identify the strength and weaknesses of ABC are determined.

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