Analysis on ABC Costing

Running head: ANALYSIS ON ABC COSTING
Analysis on ABC Costing
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ANALYSIS ON ABC COSTING1
Table of Contents
Use of ABC by organisation and size..........................................................................................2
Reasons for not using ABC widely..............................................................................................3
References....................................................................................................................................5

ANALYSIS ON ABC COSTING2
Use of ABC by organisation and size
Activity Based Costing is a modern day costing technique that identifies all the costs
incurred by an organisation and allocates all the costs according to the consumption by each
product and service. It has been noted that a positive relation exists between the size of the firm
and its likeliness to implement ABC Costing. This is because large firms generally tend to have
the resources and expertise to maintain a complex system of costing like the ABC (John 2014).
However, along with size, willingness and ability of the firm to the costing system also play a
significant role in its implementation. It has also been noted that the level of innovations
occurring in small scale firms tend to be very limited in nature. Hence, they prefer sticking to the
traditional costing methods as their production processes do not tend to make a complex system
like ABC necessary for measuring the costs incurred by the entity (Charaf & Bescos, 2013).
Using ABC costing has also been found to provide competitive advantage by enabling an entity
to do cost effective business with its competitors. The results obtained from ABC are used as a
yardstick by most of the businesses in measuring their cost effectiveness over their rivals. It also
provides a distinct idea about where an entity stands with regards to the other firms operating in
the industry (Ismail & Reddy, 2017). Due to the increased pressure on entities after the global
economic crisis, innovation has become extremely important for firms to survive and thrive in
the long run. One of the most common aspects that every organisation looks forward to is to
innovate while maintaining the same level of quality in the products. Applying ABC analysis in
inventory management results in cost savings during an order cycle and thus prolongs the
production capabilities and costing life cycle of a firm. It also generates additional capital
amount for a firm which is very valuable in conducting the business in an effective manner. As