what are the benefits of activity costing ?

Question

what makes it so escecal for an organisotion to use activity based costing ?

Answer 1

The Benefits of Activity-Based Costing
Activity-based costing improves the accuracy of product costs in three ways. First, activity-based costing usually increases the number of cost pools used to accumulate
overhead costs. Rather than accumulating all overhead costs in a single, plantwide pool, or accumulating them in departmental pools, the company accumulates costs for each major activity. Second, the activity cost pools are more homogeneous than departmental cost pools. In principle, all of the costs in an activity cost pool pertain to a single activity. In contrast, departmental cost pools contain the costs of many different activities carried out in the department. Third, activity-based costing changes the bases used to assign overhead costs to products. Rather than assign costs on the basis of direct labor or some other measure of volume, managers assign costs on the basis of the activities that cause overhead costs.In a traditional costing system, overhead is typically applied to products on the basis of direct labor-hours. As a consequence, it may appear that overhead costs are caused by direct labor-hours. In activity-based costing, managers see that batch setups, engineering change orders, and other activities cause overhead costs rather than just direct labor. Better understanding can lead to better decisions and better control over overhead costs. Finally, activity-based costing can be used as part of a program to improve the overalloperations in an organization. It can provide valuable clues concerning the activities that could benefit most from TQM, process reengineering, and other improvement initiatives.