Question

3. explain why more companies are changing their costing system to Activity Based Costing.   (8 marks)

Answer 1

Activity based costing is a type of costing whereby the overheads are located on the basis of cost centre or on the basis of consumption by the product.

More and more businesses and companies are adopting activity based costing because of the following reasons:

1) Activity based costing gives accurate cost per unit as it is based on actual consumption.

2) It is useful for the management to trace the cost located to the product and helps them in better decision making.

3) It help them to understand the amount of cost which is required for a product and can be useful in reducing the cost and increasing the profit.

4) If a company wants to launch new product then cost based drivers in activity costing provide them to set the selling price.

5) Activity based costing helps the management to identify any spare capacity and hence can be used to increase the production in low cost.