Question

Discuss: The impact of applying Activity- Based Costing System on the businesses financial and managerial performance. The discussion needs to be supported with logical reasoning and clarity. (minimum 750 words)

Answer 1

ABC is an accounting methodology that assigns cost to activities rather than products and services.

ABC system can effectively supports the management by furnishing data at the operational level and strategic level. Accurate product costing will help the management to compare qthe profits of various customers, product lines and to decide on price strategy etc.

Information generated by ABC system can also encourage management to redesign the products.

ABC system will report on the resource spending.

ABC system can change the method of evaluation of new process technologies, to reduce setup times, rationalisation of plant layout in order to reduce or lower material handling costs, improve quality etc.

Performance based accurate feedback can be provided to cost centre managers.

ABC analysis helps managers focus their attention and energy on improving activities and the actions allow the insights from ABC to be translated into increased profits.

Accurate information on product costs enables better decisions to be made on pricing, marketing, product design and product mix.