Uses & Limitations of Activity Based Costing (Cambridge (CIE) A Level Accounting): Revision Note

ABC costing can help decision makers to:

• understand why costs happen and what activities are causing them

• use activity information to help set realistic production targets

• identify which product is using the most resources and costing the most

• set more accurate selling prices, which helps the business stay competitive

• improve activities (cost drivers) to make them more cost-efficient

Change the selling price because the cost per unit is closer to the true cost

Analyse products to see which one makes the best use of activities and resources

Create a production plan that focuses on the most profitable products

The cost drivers provide an accurate basis to apportion the cost

A more accurate cost per unit will lead to a more accurate selling price

Easier to identify inefficiencies within the activities

Decision on product mix is made easier

Acceptable method under the international accounting standard (IAS)

More accurate value of closing inventory, which means the profit figure will be more accurate

Requires businesses to collect a lot of data on cost drivers

Time consuming and expensive

Not always easy to identify the cost drivers

Only suitable for businesses that have a range of activities as part of their manufacturing