Uses & Limitations of Activity Based Costing (Cambridge International A-Level Accounting)

Decision-making using ABC

Spec point — how to apply ABC costing techniques to make business decisions and recommendations using supporting data

Does ABC costing help with decision-making?

• ABC costing can help decision makers to:

  • understand why costs happen and what activities are causing them
  • use activity information to help set realistic production targets
  • identify which product is using the most resources and costing the most
  • set more accurate selling prices, which helps the business stay competitive
  • improve activities (cost drivers) to make them more cost-efficient

How can ABC costing help with key business recommendations?

• Change the selling price because the cost per unit is closer to the true cost
• Analyse products to see which one makes the best use of activities and resources
• Create a production plan that focuses on the most profitable products

Uses & Limitations of Activity Based Costing

Spec point — the uses and limitations of ABC

What are the benefits of ABC?

• The cost drivers provide an accurate basis to apportion the cost
• A more accurate **cost per unit **will lead to a more accurate selling price
• Easier to identify** inefficiencies** within the activities
• Decision on **product mix **is made easier
• Acceptable method under the international accounting standard (IAS)
• More accurate value of** closing inventory,** which means the profit figure will be more accurate

What are the limitations of ABC?

• Requires businesses to collect a lot of data on cost drivers
• **Time consuming **and expensive
• Not always easy to identify the cost drivers
• Only suitable for businesses that have a** range of activities** as part of their manufacturing