Advantages of Activity Based Costing Report

Running head: COST REDUCTION
Cost Reduction
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Relevance, Importance and Advantages of Activity Based Costing (ABC)..............................2
Relevance of ABC..................................................................................................................2
Importance of ABC................................................................................................................2
Advantages of ABC...............................................................................................................2
Criticism of ABC.......................................................................................................................2
References..................................................................................................................................4

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Relevance, Importance and Advantages of Activity Based Costing (ABC)
Relevance of ABC
ABC provides the companies with more precise technique of product or service
costing which contributes to more precise decisions of pricing. This enhances comprehension
on overheads and various cost drivers by making the non-value adding cost activities more
noticeable so that they can be reduced or eliminated (Mahal and Hossain 2015).
Importance of ABC
The importance of ABC can be seen in allowing appropriate challenge of operating
costs in order to find better ways to allocate as well as eliminate overheads. This helps in
enabling enhanced product and customer profitability analysis. It is majorly significant in
supporting performance management methods like scorecards and continuous improvements.
Advantages of ABC
 ABC provides more accurate cost per unit that improved performance management,
sales strategy and decision making.
 This provides improved insights on the drivers of overhead costs.
 It identifies the unrelated overhead costs so that they can be eliminated.
 This can be applied for deriving realistic costs in complex business environment.
 This can be applied to all overhead costs along with production overheads (Almeida
and Cunha 2017).
Criticism of ABC
Critics indicate the problem in continuing ABC calculations to optimize
circumstances because of the inclusion of different levels of cost objects in it. Since ABC is
an inclusive solution, it is difficult to conduct ad hoc analyses on single products by not
establishing relatively considerable system. This is also criticized as the ABC model does not

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consider measurement, variability and reversibility that are the fundamentals of financial
control.

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References
Almeida, A. and Cunha, J., 2017. The implementation of an Activity-Based Costing (ABC)
system in a manufacturing company. Procedia manufacturing, 13, pp.932-939.
Mahal, I. and Hossain, A., 2015. Activity-based costing (ABC)–an effective tool for better
management. Research Journal of Finance and Accounting, 6(4), pp.66-74.