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[Management Accounting] Discuss the strengths and weaknesses of activity-based costing vs volume based costing system - Essay Example

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Activity-based costing uses information from Enterprise Resource Planning System to apportion costs to products and services. ABC system…
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[Management Accounting] Discuss the strengths and weaknesses of activity-based costing vs volume based costing system
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[Management Accounting] Discuss the strengths and weaknesses of activity-based costing vs volume based costing system

The system is also accurate because it identifies products and then assigns to them direct and indirect costs. This means that ABC identifies the cost of producing various products. This then enables companies to determine the products that are highly profitable and those that produce low returns (Kaplan, & Anderson, 2005). Organizations then decide to produce the profitable products in large quantities and the less profitable ones in low or no quantities.
ABC system helps managers in forecasting demand for their products and predicting sales using the company’s capacity. The capacity of an organization refers to the ability of employees and machines to produce goods of a certain quantity. Organizations compare the products that employees and machines produce in a day and those that consumers purchase on the same period. If the company sells all the products that it produces, it discovers that its demand is higher than its capacity (Drury, 2012). If consumption is less than production, companies, are able to tell that the level of demand is below its capacity. Organizations then determine the amount of output to produce using the comparisons.
ABC system is vital in identifying wasteful products and ensuring resources are used productively. According to Kaplan and Anderson (2005), activity-based costing system allows managers to eliminate costs spent on non-value adding activities. This provides greater visibility into business processes and operational cost drivers. Improving information visibility also enables cost managers to deploy quality-related initiatives by identifying and eliminating poor quality activities together and their cost drivers (Gilbert, 2007). This is beneficial to the company as it increases efficiency and profitability because firms concentrate on profitable activities and products.
Setting an activity-based system is costly and time-consuming. Extra costs are caused by the need to hire the services of a consultant with ... Read More
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