Advantages Of Activity Based Costing

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A cost accounting system is a process or a method used by a business to estimate the cost of their products and to determine how a firm utilizes and earns funds. It aids management in making decisions and in the planning and control of an organization. All types of businesses, whether service, manufacturing or trading, healthcare, require cost accounting to track their activities. Therefore, different firms follow different methods for verifying cost accounting. This paper focus on activity based costing (ABC) method that is used in two of the studies described in this paper and advantages and disadvantages associated with the method as well as associating accounting information to financial management for improvement of a firm.
The activity-based
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Because cost drivers relate to cost changes, measured or quantified amounts of cost drivers are excellent bases for assigning resource costs to activities and for assigning the cost of activities to cost objects. ABC is an economic model that identifies the cost pools or activity centers in an organization and assigns costs to cost drivers based on the number of each activity used. It is designed to assign current prices, direct labor hours to produce each of the items, their material costs, and annual production quantities. This study compares the data using traditional cost accounting method (TCA) and true cost calculation by activity based costing (ABC) method for automobile parts. In the case of Part 'A ' cost calculations, traditional costing accounting shows a margin of 25.41 % compared to ABC method margin to 27.49% (Kumar and Mahto, 2013). For Part 'B” TCA indicates the margin 27.5% and ABC margin to 25.14%. Part ‘C’ TCA 35.18% and ABC is 34.66% (Kumar and Mahto, 2013). Therefore, Part ‘A” showed more profit as compared to TCA cost calculation. True cost calculation by ABC method shows that the part C has the best margin but it is less than the TCA margin, which is 34.66 % (Kumar and Mahto, 2013). To conclude, activity based costing method gives the true costs of the parts compared to traditional cost accounting …show more content…
Activity-based costing overall can be useful to organizations if processes and associated costs are taken into account which than can increase profitability. Other advantages are that ABC approach compared to traditional is less likely to decrease cost or increase cost products and may lead to improvements in cost control (The advantages of cost accounting. (n.d.)). It also provides much better insight into what drives overhead costs and recognizes that overhead costs are not related to production and sales volume. Disadvantages of ABC method are difficulty allocating all overhead costs to specific activities and not suitable for small businesses (Hada and Chakravarty, and Mukherjee,

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