e It is said that ActivityBased Costing ABC has particular b

e. It is said that Activity-Based Costing (ABC) has particular benefits for the modern businesses. Discuss the benefits and drawbacks of using ABC in modern business environment. Illustrate your discussion by providing examples of businesses where ABC would be the most and least beneficial. (6 marks) (Total: 30 marks)

Solution

Activity based costing is the method under which different activities involved in production are analysed and the overhead costs are segregated and allocated as per the cost drivers used for the production. With this method, the costs of the products are analysed properly and helps in knowing the actual cost of the product. The concept of Activity based costing is based on the activities that the product undergoes. Under this method, the cost is allocated primarily to activities and then they are allocated to the product in prorate basis as per use of the activity. With this, the company is able to know the actual cost of the product. With this the company can actually price the product accordingly

Activity based costing helps in accurate product cost, it tells about the cost behavior of different costs.it also helps in tracing the overhead costs and better decision making.

Some of the major disadvantages of ABC costing is that it is one of the most expensive and complex method. The selection of drivers is also difficult at times when ABC costing is used.

ABC costing is used where there are different levels of utility for the organization which is particularly good for the large companies. ABC is difficult to implement for small organization.