Activity Based Costing

Question 1

Benefits of ABC

Answer 1

Provides a more accurate cost figure for each unit of output

helps in assessing product profitability and in making pricing and product mix decisions

can help managers gain a better understanding of business operations- and then improve future performance

Question 2

Criticisms of ABC

Answer 2

Costly exercise
- set up costs and updating costs can be expensive

complex and time consuming
- especially if business operations involve a large number of activities and cost drivers

management reports would be more complex making it harder for management to understand

relationship between activity costs and their drivers may be difficult to determine.

does not provide relevant information for decision making