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Advantages of Activity Based Costing YouTube

The following are the main advantages of Activity Based Costing.

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1. Activity Based Costing helps to reduce costs by providing meaningful information on
the opportunities available for reducing costs.

2. Activity Based Costing is working only on the activities. Hence, the management can
take the quality decision by knowing the nature of each activity.

3. The activities can be classified into two i.e. value adding activities and non-value
adding activities. The Activity Based Costing helps the management on focusing the
forces on value adding activities and eliminate non-value adding activities.

4. Some costs are termed as non-manufacturing costs, for example, advertisement. Even
though, advertisement is a non-manufacturing cost which constitutes a major portion of
the total cost of any product. These non-manufacturing costs can be easily allocated since
the relationship between costs and its causes can be properly understood by using Activity
Based Costing.

5. The accurate allocation of costs to various products leads to proper pricing policy.

6. The statement of expenditure is prepared on activity-wise and compare the costs of

each activity with one another to find the activities which are to be eliminated or
improved for better performance.

7. The accurate cost information helps the management to adopt productivity

improvement approaches like Total Quality Management (TQM), Business Process Re-
engineering (BPR) etc.

8. The management can take make or buy decisions by considering the cost of
manufacture of a product or sub contract the same with an outside agency through
Activity Based Costing analysis.

9. If the available resources can not be used properly even after sub contracting the
manufacture of any product, the management can do the activity of manufacture of such a
product within the firm.

10. Whenever the finished goods of Department “A” is transferred to Department “B”, the
cost of the product to Department B can be easily known. In this way, transfer pricing is
fixed.

Disadvantages of Activity Based Costing

Disadvantages of Activity Based Costing

The Activity Based Costing has some limitations which are presented below.

1. Activity Based Costing is not useful to small companies.

2. If the overheads are relatively small, there is no use of Activity Based Costing.

3. Some companies are producing only one product or few products. If so, the Activity
Based Costing cannot be applied.

4. Activity Based Costing method should not be used to prepare monthly profit
statements.

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