Activity Based Costing: A Managerial Accounting Perspective

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MANAGERIAL ACCOUNTING

ACTIVITY BASED COSTING
According to Dale and Plunkett (2017), activity-based costing is the costing method adopted by
business management that includes overhead cost, indirect costs like utilities, salaries and
other expenses to the products and services. It allocates the cost less randomly than other
traditional methods. In manufacturing firms, this costing method is more prevalent because it
produces more accurate costing data. However, it becomes difficult to assign salary and
management-cost to the products and services because these costs are hard to calculate
(Novák and Vencalek, 2016).
PROS OF ACTIVITY BASED COSTING
There are many advantages of ABC such as:
Accurate Product cost: Activity-based costing provides a very accurate and reliable
determination of cost as it realizes that it is activities that increase costs and not products and
products are responsible for consuming so many activities in the organization. By counting the
cost incurred by overheads and indirect activities, ABC presents a very real picture of costs
(Bouwens, 2017).
Better decision-making: ABC can improve the decision-making capacity of the managers as it
provides more accurate cost data and more reliable information about cost. It helps the
managers in determining more accurate selling prices and help in assigning reliable pricing
policies.
Helps in managing activities to reduce cost: Weil and Maher stated that Activity-based costing
helps in determining overhead costs and activities of the organization and helps the
management to determine which activity is needed to be controlled to save costs in the
organization thus activity-based costing helps in stimulating activity-based management in the
organization (Novák and Vencalek, 2016).
Cost Management: According to Colin Drury, ABC provides a basis for managing costs in the
organization. Activity-based costing sheds light on the underlying costs and helps the

management in managing cost so that the extra cost can be reduced and the saved amount can
be invested in more useful resources (Bouwens, 2017).
CONS OF ACTIVITY BASED COSTING
There are some disadvantages to ABC:
Expensive and complex system: Activity-based costing is a complex process than other
traditional costing systems as there are many cost drivers, cost pools and other managing
activities. Managing such a complex system is costly (Collis and Hussey, 2017).
Measurement Difficulties: The fundamental need for activity-based costing to be implemented
is the measurements that are required to carry out even the smaller costing. It requires the
management of the organization to measure cash pools, overhead costs, activity-costs, and
such measurements are complex and require proficient employees and thus the cost of these
measurements is high and these costs are needed to be updated regularly (Collis and Hussey,
2017).

References
Bouwens, J., 2017. Understanding investment decisions: the role of cost accounting. Available
at SSRN 2937256.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
Dale, B.G. and Plunkett, J.J., 2017. Quality costing. Routledge.
Novák, P. and Vencalek, O., 2016. Is It Sufficient to Assess Cost Behavior Merely by Volume of
Production? Cost behavior research results from the Czech Republic. Montenegrin Journal of
Economics, 12(3), p.139.