Conditions for ABC Costing

Conditions for ABC Costing

1.    Valuation at Full Cost

Activity based costing may be an option, when inventory is to be valued at full cost. Only activity based costing and absorption costing can be used for such stock valuation (full product cost valuation).

2.    Product Differ

Activity based costing is suitable, where product substantially differ from each other. This methods is also preferred, when product are produced as per customer specification. It is appropriate that different product is charged overhead on the bases of resource utilization.

3.    Low Labour Cost

Activity based costing is preferred for products, which have lower labour cost as compared to overhead costs.

4.    Production Value Differ Substantially

Activity based costing is also preferred for businesses, where production volume of different goods differ substantially, therefore activity based costing can be used for more appropriate absorption.