Advantages of ABC Costing

Advantages of ABC Costing

Advantages of activity based costing can be explained in terms of improved business knowledge, identification of key areas, and fair allocation of overhead, accurate product costing.

1.    Depth knowledge of business

Activity based costing provides detail knowledge of different types of activities in the organization and their contribution to a core cause of the organization i.e. profit maximization. The depth knowledge about activities and their role improves management overall understanding about business.

2.    Identification of Key Business Areas

Second advantage of activity based costing is its identification of key areas of the organization. This provides management useful information for controlling & planning. If management wants to control cost, it must focus on the areas responsible for major cost.

3.    Fair Allocation of Cost

Third advantage of activity based costing is fair allocation of cost.ABC costing is based on more fair allocation of resources especially in case of product cost. This vary reason that it activity based costing is preferred over absorption costing, which offers very general absorption methodology.

4.    Accurate Product Costing

ABC costing is more realistic allocate the absorption cost to the product. Each product is charged with the cost with level of activity used for its production. It is helpful to determine the accurate cost of a product