Advantages Of Activity Based Costing

Activity Based Costing

De Dmitrii

BA-113

Managerial Accounting

Galimova O.A.

Activity Based Costing is special method that describes the costs of the firm that identifies and assigns the cost of each such work in accordance with the present value of each individual work. This method also transfers into direct overhead costs, unlike the Traditional method describing the costs. Activity Based Costing system is considered to be as scientific approach, the process of implementation is complex, the process of data collection and data entry requires significant resources and remain high costs to maintain. Activity Based Costing system is especially important for those companies, which provide customized

By sorting all costs of products and services to individual units. Activity Based costing system method helps to find out inefficient and non-profitable products. By using Activity Based Costing method, company can reduce prices for those processes, which bring less activity and profit and increase prices for those activities, which represent more activities and bring more profit. Activity Based Costing method provides fixed selling price for multi-products, it is right, because overheads allocated on the basis of relevant cost drivers. Through the Activity Based Costing company can get more accurate information and results, because the Activity Based Costing system focused on effects of costs and activities. Unlike the traditional costing system, Activity Based Costing can focus on multi products at the same time, whereas Traditional is focused only on one specific type of overhead costs. It may bring some problems in management of the company, but if the company has professional managers in, professional workers will bring some flexibility in managing financial information and will transfer invisible things visible and understandable for internal usage and then convert for external

For this system, businesses can use modern technologies. Companies can need assistance or consulting person, which can provide trainings on usage Activity Based Costing system, which costs some money. Reports of Activity Based Costing are irrelevant for strategic decision methods, because it is not conform to the standards of traditional accounting system and cannot be used for external reports. Activity Based Costing system is limited in ability of identifying what is important for company and what is just profitable. The system can identify non-profitable channel and reduce it, but at the same time this part is strategically important for company, so there are some data misunderstandings, which lead to weak strategic decision-making. Since the traditional accounting system (GAAP) tends to be norm for all businesses, Activity Based Costing system can be confused and lead to weak decision making along traditional accounting system. The company forced to have two accounting books and cost systems, one (GAAP) is provided for external users, second (Activity Based Costing) is for internal. Even if the company is going to implement Activity Based Costing system, financial managers should understand that they still would work with Traditional costing PLUS Activity Based Costing system. Activity Based Costing system is very sensitive to all types of information, even small part of information, which is not actually