The advantages and disadvantages to using an ABC system|My homework helper

Posted: January 28th, 2023

Discuss all of the following regarding activity-based costing systems:

• The advantages and disadvantages to using an ABC system • Why an organization might not experience financial improvement after

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implementing an ABC system with hopes of process improvement and cost reductions

2 pages maximum

 

SOLUTION

Activity-based costing (ABC) systems are a method of accounting that aims to accurately assign costs to products or services by identifying the specific activities that go into producing them. Some advantages of using an ABC system include:

  • Improved accuracy in cost assignment, as costs are traced to specific activities rather than being allocated based on broad cost pools.
  • Better visibility into the cost drivers of a business, which can help identify areas where cost reductions can be made.
  • Greater alignment of costs with revenues, which can aid in pricing decisions and profitability analysis.

However, there are also some disadvantages to using an ABC system, including:

  • Increased complexity and cost of implementation, as many activities and their costs must be identified and tracked.
  • The need for significant changes in data collection and management processes, which can be time-consuming and costly.
  • The potential for managers to focus too heavily on cost reduction at the expense of other important business goals.

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