Discuss the advantages and disadvantages of using an Activity Based Costing (ABC) over other costing systems. Also identify at least one company that uses ABC and describe how it benefits the company.
This paper has been formulated in order to determine the basic nature of Activity Based Costing, its advantages and disadvantages. These points are further elucidated by a case study of a Taiwanese hot spring country inn’s implementation of the ABC system.
What is Activity Based Costing
The Activity-Based Costing theory started in 1987 by Robert S. Kaplan and W. Bruns as a better alternative to the traditional costing method. It has activities as the fundamental ...view middle of the document...
Advantages of an Activity Based Costing System
The most obvious advantage is the accuracy in cost calculation with regards to the production line which streamlines the flow of the product from the producer to the end user by using unitary cost, or marginal cost as the computation base in contrast to the traditional cost accounting methods which employ total cost.
This system is able to better assists in understanding the concept of overhead costs i.e. the allocation of common business resources as they are used by specific product lines and their relation to specific cost driver.
The system is easy to comprehend and translate. It is accessible and practically implement able across all functionalities of business operations.
This system can better assist in identifying burden or waste on the operation of the business i.e. wasteful or non value adding services. Allowing companies to implement costing strategies across all functions by decreasing time and resource consumption.
The system can also compliment with performance management which is used by HR departments in today’s modern business environments. Aiding in the process of benchmarking and quality control.
Disadvantages of an Activity Based Costing System
Data collection process for this system is very time consuming and complicated.
The capital expenditure on the activity based system and its subsequent running costs can be a road block for companies.
This system needs to analyze a large amount of data which can not be processed without powerful computer system and technology
ABC system requires management to change the concept of cost and how it is perceived and calculated, which may be difficult to adapt to at times.
This system needs to be implemented and applied to more companies internationally for experiment purposes of transferring theories into practices.
The hot spring country inn in my researched case study is located on the Yang-Ming mountain of Taipei. It faces high...