147965
Description
Mind Map by Shahid Musthafa, updated more than 1 year ago
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Created by Shahid Musthafa
over 11 years ago
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Merits & Demerits
of ABC Costing
- Merits
- ABC provides a more
accurate method of
costing of products and
services.
- It allows for a better and more
comprehensive understanding of
overheads and what actually causes
them to occur thus provides
opportunities to control overhead costs.
- It makes costly and
non-value adding
activities more visible, so
allowing managers to
focus on these areas to
reduce or eliminate them.
- It supports other management
techniques such as continuous
improvement, scorecards and
performance management.
- Fixation of selling price for
Multi-products under
activity-based costing is fair
and correct because
overheads are allocated on the
basis of relevant cost drivers.
- ABC provides a more
accurate method of
costing of products and
services.
- Demerits
- It can be costly to implement, run and manage
an ABC system.The benefits of ABC Costing
might not always justify the costs incurred
- Even in ABC some overhead costs are difficult
to assign to products and customers. These
costs still have to be arbitrarily applied to
products and customers.
- It is more complex to understand
so that the management may it
difficult in explaining ABC to
stakeholders
- ABC costing is not suited
for a case where OH are of
a small proportion than
Prime Costs and
overheads are mostly
driven by volume of
production
- ABC requires a new set of accounting records
,this is often not immediately available and
therefore a resistance to change is common
.the setting up of new cost pools and related
cost drivers is required which is time
consuming ,thus ABC can be difficult and time
consuming to collect the data about activities
and cost drivers.
- It can be costly to implement, run and manage
an ABC system.The benefits of ABC Costing
might not always justify the costs incurred
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