Activity-Based Costing (ABC) helps a business organization to focus its attention on the real nature of costs' behavior and reduce them. Additionally, the system is flexible, exploring the costs to the customer, process, product, and the managerial responsibility area. It also helps to trace the overhead costs to the products (Soekardan, 2016). However, the ABC system brings about the wrong conception due to the reduction of the number of cost drivers activity. Additionally, the ABC system requires profound and numerous data collection that exceeds the need to develop a report for the external users.
A company will highly benefit by implementing the ABC system as it can easily determine whether the costs are less relevant, whereby in the traditional system they are hidden. Additionally, using the ABC system the management can make necessary decisions on make-buy (Salem & Mazhar, 2014). The management is reasonably able to conduct competitive bidding in the marketplace using the analyzed data on costs. Therefore, the ABC system is important in companies as it focuses attention on the real nature of cost's behavior thus necessary in reducing costs and identifying non-value-added activity (Reyhanoglu, 2004). Additionally, company managers should opt for the ABC system as it provides a reliable indication of the long-run variable cost product, which is a necessity for strategic decision-making.
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Hello Childers,
I commend your explanation on the advantages of implementing an ABC system, where you illustrate its importance in viewing each product and its costs especially in the companies producing a variety of materials. I like that you have identified one disadvantage of the ABC system as its expensiveness, which could be a problem for small companies. I acknowledge that you have mentioned that it is time-consuming to trace the costs of every product produced in a particular company. It is commendable how you explain a company achieves competitive advantage by applying the ABC system in evaluating products individually and their costs to determine their selling price. It is also commendable that you have identified that with the ABC system, company managers' can evaluate departments, employees, and business units.
References
Reyhanoglu, M. (2004). Activity-Based Costing System Advantages and Disadvantages. SSRN Electronic Journal. https:// doi: 10.2139/ssrn.644561
Salem, S. & Mazhar, S. (2014). The Benefits of the Application of Activity-Based Cost System- Field Study on Manufacturing Companies Operating in Allahabad City-India. Journal of Business and Management, 1 6(11), 39-45. Retrieved 21 January 2021, from https://pdfs.semanticscholar.org/3c86/1ec9c1c78866dfc5fe3fefed5998b50feb24.pdf
Soekardan, D. (2016). An Analysis of Activity-Based Costing: Between Benefit and Cost for Its Implementation. International Journal of Scientific and Technology Research. 5(6) 334-339. Retrieved 21 January 2021, from https://www.ijstr.org/final-print/june2016/An-Analysis-Of-Activity-Based-Costing-Between-Benefit-And-Cost-For-Its-Implementation.pdf
