Strength And Weaknesses Of Activity Based Costing

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4.0 STRENGTH AND WEAKNESSES OF ACTIVITY BASED COSTING
4.1 Strength of Activity Based Costing
4.1.1 Measures profits more precisely
An organization can make better company strategies decisions on product lines, product mix, market targeting and market segmentation and pricing with precise and systematic information on product cost.
4.1.2 Make better business decision
ABC builds a clearer relationship among varies activities and the activity-driving costs. With this decision-making tool, it helps the managers to upgrade and develop the product and services that satisfy customer needs to deliver superior customer value. It also reduces unnecessary expenses in order to increase the margin profit.
4.1.3 Cut cost
The costs of every single activity performed during manufacturing is highlighted in order to identify the expenditure which be eliminated.
4.1.4 Lessen Cost Distortion
The costs related can be assigned more equitably for each individual jobs or products. In ABC Costing, the allocation of indirect cost is based on the kind of product activities and the range of the activities organized.
4.1.5 Match the manufacturing overhead costs with the product better.
The effectiveness and efficiency of each department in the company can be improved with better matching of the manufacturing overhead costs with the products. The costs differences between departments and the usage difference between jobs-better jobs of matching each department’s overhead costs to the products that use the department resources can be determined
4.1.6 Make better cost estimation of individual jobs or product
The cost of individual jobs or products can be determined more accurately by using ABC costing system. It is essential to make a good business decision ...

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...workable decision.
4.2.5 Additional work
The company needs to sustain two cost systems and accounts, one for internal use and another for external reports since the direct use of accounting method in analysis of the ABC data cannot be used. Different reports are required to prepare for different purposes in ABC costing lead to additional works that making the resources not using productively.
4.2.6 Lose sight of strategic objectives
The company might neglect their strategic objectives in their business as they pay too much attention to small, less important details. ABC costing makes the managers concentrates more on the allocation of costs on individual jobs, less on the overall allocation of budgets and resources. Excessive concern about the small savings would lead to huge losses in long term if the company benefits and business target are always ignored behind.

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