ACTIVITY-BASED COSTING: AN EVALUATION

Description

Activity-based costing (ABC) systems allocate costs to products or customers in a way that theoretically reflects reality better than traditional standard cost systems (Unit-based Cost Systems). ABC systems are more sophisticated and complex than standard cost systems. Most standard cost systems, in a grossly oversimplified approach, allocate all overhead costs to individual products using a single allocation basis (such as direct labor, machine hours, or material dollars) that is highly correlated with unit volume. In contrast, ABC systems allocate costs through a two stage process using multiple allocation bases, which may not be related to unit volume. ABC advocates claim that ABC can help identify opportunities for product mix changes, pricing changes, process changes, and organization restructuring. But, numerous critics have argued that ABC is simply standard costing warmed over, and therefore, does not eliminate the fundamental problems of standard costing. Perhaps...