1. Activity-Based Costing (ABC) is a method of allocating costs to products and services.

It is generally used as a tool for planning and control. It was developed as an approach to address problems associated with traditional cost management systems, that tend to have the inability to accurately determine actual production and service costs, or provide useful information for operating decisions. With these defiencies managers can be exposed to making decisions based on inaccurate data. The higher exposure is for companies with multiple products or services.

ABC allows managers to attribute costs to activities and products more accurately than traditional cost accounting methods. The activities responsible for the costs can be identified and passed on to users only when the product or service uses the activity. Some of the advantages ABC offers is an improved means of identifying high overhead costs per unit and finding ways to reduce the costs. Advantages of an Activity Based Costing System: •The first and most important advantage is the accuracy in the process of costing with regards to the product line, the end-users of the product, the stock-keeping units employed by the management and the channel and category which streamline the flow of the product from the producer to the end user. •This system better assists in the process of understanding the concept of overhead costs i.e. the allocation of common business resources as they are used by specific product lines and their relation to specific cost driver. •The system is easy to understand and interpret is it is accessible, useable and practically implement able across all norms of business set-ups. •This process uses unitary cost, or marginal cost as the computation base in contrast to the traditional cost accounting methods which employ total cost. •The system works exceptionally well will quality improvement and up gradation programs e.g. Six Sigma •This system is particularly helpful in identifying and ear-marking some of the matters business activities which are a burden or stress on the business i.e. wasteful or non value adding services.

•This system aids in the process of benchmarking which is an integral part of the quality control system. •The system is very transparent which some managers would not approve of as they would like to keep some things out of the view of the owners of the company. Disadvantages of an Activity Based Costing System: •Data collection process for this system is very time consuming.•The system also works exceptionally with performance management systems which are employed by most human resource departments in contemporary businesses. •This system mimics the actual business process as the appropriation of common pool resources takes place in the same way as common resources are used in the business. •The capital expenditure on the activity based system and its subsequent running costs can be a road block for firms. •This process allows companies to implement costing strategies across another diagonal of the firm as business processes. . supply chains and value addition channels are ably and optimally analyzed in this process.

(ii) A uniform costing system for the firms in the same industry is provided for the adoption of such undertakings. therefore it is readily adopted and successfully implemented. Unhealthy competition is avoided between the firms in the same industry in framing policies and submitting tenders. (vi) This system of costing requires the introduction of a uniform wage system in all the firms in the industry.2. duties and price determination. Adherence to the same costing methods and procedures specially when there can be two or more options is the characteristic feature of a uniform system of costing. Since the system is devised by manual consultation and after considering the difficulties and circumstances prevailing in the various undertakings. The introduction of a uniform wage system reduces labour turnover. particularly. when an industry seeks any assistance or concession from the government in matters of subsidies. (iv) The availability of cost data of other firms in the industry enables each firm to know its standing in the industry. (v) The benefits of research and development of bigger firms are made available to smaller firms at no cost. (vii) It helps trade associations in negotiating with the government in trade matters. Advantages of uniform costing: (i) The management of an individual firm / unit will be saved of the botheration of developing and introducing a costing system of their own. taxation. (viii) Uniform costing is of great help in price fixation. Uniform costing refers to the use of the same costing principles and practices by several undertakings. These undertakings may or may not be under the same management. exports. (iii) It facilitates comparison of cost figures of various firms. Such a comparison enables the firms to identify their weak and strong points and control costs effectively and efficiently. etc. .

(iii) Small firms feels that uniform costing system is meant only for large and medium size firms and thus they cannot afford it.(ix) It helps the government also in regulating the prices of essential and important items such as bread. This renders the adoption of uniform costing difficult. flour. sugar. Limitations of uniform costing: (i) Due to the differing circumstances in which firms operate. sets product cost targets based on that product’s expected gross margin and then manages the development process to achieve the targets. (iv) Some feels that the use of this system of costing may lead to monopolistic tendencies resulting in artificially raised higher prices and curtailing supplies. 3. Formula Target Cost = Expected selling price – Desired profit It helps in completing the product within the set price by changing the process for the same or by making the existing process more efficient. methods and procedures of costing. it is difficult to have uniform standards. Identification of customer needs and wants . cement and steel etc. (ii) Adoption of a uniform costing system requires various firms to disclose their cost and other data. The process of target costing is as below: 1. TARGET COSTING: Target costing is a process of determining the actual cost price of any product or service after considering the desired profit margin behind the same. Some of the firms do not like this and are thus hesitant towards the use of this costing system. Target costing is an approach to managing product costs and gross margins that works backward from the price a customer will pay for a specific product with a specific feature set.

disadvantages or limitations: 1. 3. Effective implementation and use requires the development of detailed cost data. Orients organizations towards customers. Proactive approach to cost management. 5. 7. manufacturing process is fixed and suppliers are identified keeping the price in consideration. Encourages selection of lowest cost value added activities. 2.2. The sample product is produced that meets the target and the production starts for selling purposes and the product is launched advantages or benefits: 1. Implementation enhances employee awareness and empowerment. Breaks down barriers between departments. Product is designed. Reduced time to market. 5. Minimize non value-added activities. Foster partnerships with suppliers. Target cost identified which is Expected selling price – Desired profit 4. 6. 4. May reduce the quality of products due to the use of cheep components which may be of inferior quality. 2. its implementation requires willingness to cooperate 3. . 3. Requires many meetings for coordination 4. Selling price is planned for the needs. 8.