Merits & Demerits of ABC Costing

Merits & Demerits of ABC Costing

1. Merits

   • ABC provides a more accurate method of costing of products and services.
   • It allows for a better and more comprehensive understanding of overheads and what actually causes them to occur thus provides opportunities to control overhead costs.
   • It makes costly and non-value adding activities more visible, so allowing managers to focus on these areas to reduce or eliminate them.
   • It supports other management techniques such as continuous improvement, scorecards and performance management.
   • Fixation of selling price for Multi-products under activity-based costing is fair and correct because overheads are allocated on the basis of relevant cost drivers.

2. Demerits

   • It can be costly to implement, run and manage an ABC system.The benefits of ABC Costing might not always justify the costs incurred
   • Even in ABC some overhead costs are difficult to assign to products and customers. These costs still have to be arbitrarily applied to products and customers.
   • It is more complex to understand so that the management may it difficult in explaining ABC to stakeholders
   • ABC costing is not suited for a case where OH are of a small proportion than Prime Costs and overheads are mostly driven by volume of production
   • ABC requires a new set of accounting records ,this is often not immediately available and therefore a resistance to change is common .the setting up of new cost pools and related cost drivers is required which is time consuming ,thus ABC can be difficult and time consuming to collect the data about activities and cost drivers.