Using An Activity Base Costing ( Abc ) System

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While all three costing method would work for a newly existing company in various areas, the actual costing method would be best for the first few years. The reason for this rationale, is that the company is new to the business environment and it would take some time for managers to acclimate their operations and production levels. As time passes, managers will have to change their strategy to the normal costing to avoid losing consumers to its competitors. Firms’ have to be able to reduce costs for their products and services, without losing the quality of the products (Apak, 2012). Anderson & Dekker (2009) added that as the value of products and services increases, firms’ find it difficult to manage complex areas of operations,…show more content…
The ABC system can then apply the cost to modifying an original vehicle to the specifications of the customer. While an ABC system is beneficial for most manufacturing firms, the system does have some advantages and disadvantages that managers should take into consideration (Blocher et al, 2013). Advantages • Activity costs – the system is designed to monitor costs of each activity of a firm, for correlation with industry standards and ongoing activity costs and cost reduction. • Better profitability – the system is designed to monitor consumer activities for overhead cost, to help managers understand which consumers are costing the firm more in overhead and less in profits. • Process improvement – the system monitors distribution channels also, for overhead cost. In some cases, overhead cost from certain distributors are not worth the overhead. • Improved planning – the system allows managers to determine whether or not it is best for the firm to produce a product or have another firm produce it. • Cost of unused capacity – the system helps managers to determine the where to reposition resources, depending upon the margin of various products at various locations. Disadvantages • Cost volume – the ABC system works best with a large number of cost activities and continually running a cost analysis to maintain each activity. Therefore, for some small firms or firms with a few product lines will not benefit as well from the system.
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