BM1701

NAME: MERCADO, KATHLEEN OPEÑA ________________ DATE: 01/30/2022

SECTION: BSA-501 ___________________________

ABC brings accuracy and reliability in product cost determination by focusing on cause-and-
effect relationship in the cost incurrence. It recognizes activities which cause costs, not
products and it is product which consume activities. ABC identifies the real nature of cost
behavior and helps in reducing costs and identifying activities which do not add value to the
product. ABC uses multiple cost drivers, many of which are transaction based rather than
product volume. Further, ABC is concerned with all activities within and beyond the factory
PLUS to trace more overheads to the products. ABC traces costs to areas of managerial
responsibility, processes, customers, departments besides the product costs. ABC
improves greatly the manager’s decision making as they can use more reliable product cost
data.

ABC has numerous cost pools and multiple cost drivers and therefore can-be more complex
than traditional product costing systems. It can prove costly to manage ABC system. Some
difficulties emerge in the implementation of ABC system, such as selection of cost drivers,
assignment of common costs, varying cost driver rates. ABC has different levels of utility for
different organization such as large manufacturing firm can use it more usefully than the
smaller firms. Also, it is likely that firms depending on cost-plus pricing can take advantages
MINUS from ABC as it gives accurate product cost. But those firms who use market-based prices
may not favor ABC. The level of technology and manufacturing environment prevailing in
different firms also affect the application of ABC. he main costs and limitations of an ABC
system are the measurements necessary to implement it. ABC systems require
management to estimate costs of activity pools and to identify and measure cost drivers to
serve as cost allocation bases. Even basic ABC systems require many calculations to
determine costs of products and services. These measurements are costly. Activity cost
rates also need to be updated regularly.
ABC provides cost driver rates and information on transaction volumes which are very useful
to management for cost management and performance appraisal of responsibility centers.
Cost driver rates can be used advantageously for the design of new products or existing
products as they indicate overhead costs that are likely to be applied in costing the product.
Service organizations, such as banks, hospitals, and government departments, have very
different characteristics than manufacturing firms. Service organizations have almost no
INTERESTING direct costs, most of the costs are overheads and they do not hold stocks of service as the
service is consumed when it is produced. Traditional costing has generally been considered
inappropriate for these organizations, whereas ABC offers the potential of benefits from
improved decision making and cost management.

06 Activity 4 *Property of STI

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