What are the advantages and limitations of Activity Based Cost approach to capital budgeting?
Activity-Based Costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to products and services according to the actual consumption by each in order to arrive at the actual cost of products and services.
In Activity based costing costs of all organization's resources are assigned to the products and services that the organization manufacture/render.The main intention behind the assignment of resource cost to the product/services is to find out the cost of the product and the resultant profitability.
The main purpose of Activity Bases costing is the elimination of unprofitable activities in the organization. Further, to identify the over priced activities in order to lower the prices of those activities. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives.
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The solution contains the meaning of Activity based costing, advantages and disadvantages of ABC in capital budgeting.