Sample Essay
The activity based costing system however is based on the costs of the organizations resource, which are assigned as per the different activities which are performed by the company in order to provide the products to the customers. This costing is also very useful as an aid for making strategic decisions and can provide significantly for the improvement initiatives as well. The activity based costing system is a more accurate form of costing system which can be applied to costing of products services as well as customers and SKUs.
Moreover the process is much simpler than other costing methods making it much more comprehendible for the staff and the managers. The process tends to highlight utilized cost instead of total cost and integrates with the six sigma system and the continuous improvement system. Moreover it also provides a much better understanding of overheads and facilitates bench marking. The limitations of the activity based costing system include that it is time consuming and makes waste visible.
The activity based method of costing is best suited for the operations of the company, as the resources, and the costs will be accounted for according to the different activities taking place in the company. Aside from this the unallocated or unrelated overheads of the company which are not related to the production process will not be directly charged to the product. This will allow the company to lower its costs and therefore provide a better price to its customer resulting in becoming competitive in the market.
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