wat is the advantages and importance of activity based costing?

Answer 1

Activity based costing (ABC)also called as activity based management is a tool used to identify individual activities as fundamental cost objects.Under ABC cost calculation is done for each individual activities & assign costs to objects like product/services on the basis of activites needed to produce product/services. ABC Asssumes that cost objects consumes activites & activites consume resources.ABC focus on indirect costs(overheads),traces rathar than allocates each expense category to particular cost object, makes indirect costs direct.
Advantages
1 Improves cost management & profitability by avoiding unwanted activities.
2 Helps in cost reduction & process improvement decisions in production activities.
3Helps in product design decisions
4 provides support in planning & managing activities.Helps in removing unwanted activities in prodcution management.
When to use activity based costing(ABC)?
1 When competitionis stiff.
2 When overheads are high
3 When product are diverse due to complexity ,volume, & amount of labour.
4 When cost of errors are high