The Advantages And Disadvantages Of Activity-Based Accounting Methods

Activity-Based Costing Nowadays, information is a necessity for a company to gain competitive advantage. Furthermore, one of the means that a company can achieve such advantage is to be cost efficient leading to achieving economies of scale, which in turn creates the opportunity for the companies to sell their products at a lower price, attain profitability, and ultimately, to gain market share. Hence, determining the cost of a product in a most accurate way eliminates the costs which cause the company to have lower returns is very critical to the company’s success. Because of the limitation of information generated by traditional cost accounting system, Activity-based Costing was then introduced by Cooper and Kaplan to provide the information that cannot be generated by using traditional cost accounting alone.

ABC Costing is a cost accounting method used by the management to identify activities and assign the cost of overhead for each activity to the products or services directly to the cost objects with respect to the actual usage of resources. ABC does not reduce the overhead cost but will accurately pinpoint which product it should

The implementation process is very complex which is difficult to understand at first because it produces numerous data, activity measures and requires collecting and checking the process (Mahal and Hossain, 2015). As cited by Rasiah, Datar and Gupta (1994) indicated that one of the disadvantages of ABC is that ABC increases the frequency of errors in product cost measurement because of increasing number of cost pools. Another disadvantage mentioned by Noreen (1991) is that ABC implementation provided beneficial results only under specific conditions. ABC required a level of exactness which is difficult to attain and time consuming. Some authors argue that ABC could not reliably measure the short-term impact of decisions on operating costs and