Advantages and Disadvantages of Activity Based Costing (ABC) for UPSC Commerce Optional Paper -2

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Advantages of Activity Based Costing (ABC):

The following are the advantages of ABC:

1. Accurate Product Cost:

ABC provides reliable and correct product cost data even in case of larger diversity among the products manufactured such as low-volume products and high-volume products. 

2. Information about Cost Behaviour:

ABC identifies nature of cost behaviour and helps in reducing costs and identifying activities which do not add value addition to the products. 

3. Tracing of Activities for the Cost Object:

ABC uses multiple cost drivers for tracing of Activities for the Cost Object. 

4. Tracing of Overhead Costs:

ABC traces Overhead costs related with different areas and different department of Company.

5. Better Decision Making:

ABC improves better the manager’s decision making as they can use more reliable product cost data. 

6. Cost Management:

ABC provides cost driver rates and information on transaction volumes which are very useful to management for cost management and better performance appraisal of responsibility centres. 

7. Benefit to Service Industry:

ABC costing gives various benefit to Service sector as service organisations have almost no direct costs.


Disadvantages of Activity Based Costing (ABC):

The following are the Disadvantages of ABC:

1. Expensive and Complex:

ABC has various cost pools and multiple cost drivers and therefore ABC can be more complex than traditional product costing systems.

2. Selection of Drivers:

Selection of cost drivers and assignment of common costs  are emerged in the implementation of ABC system.

3. Disadvantages to Smaller Firms:

ABC has different levels of utility for large manufacturing firm such as large manufacturing firm can use it more useful than the smaller firms. 

4. Measurement Difficulties:

ABC systems require more calculations to determine cost rates of products and services. These measurements are almost difficult. Activity cost rates also need to be updated  at regular Interval.