a) It provides much better insight into what drivers overhead costs. The complexity of manufacturing has increased, with wider product ranges, shorter product life cycles and more complex production processes. ABC recognizes this complexity with its multiple cost drivers.
b) In a more competitive environment, companies must be able to assess product profitability realistically. ABC facilitates a good understanding of what drivers overhead costs.
c) In modern manufacturing systems, overhead functions include a lot of non-factory-floor activities such as product design, quality control, production planning and customer services. ABC is concerned with all overhead costs and so it takes management accounting beyond its ‘traditional’ factory floor boundaries. ABC recognizes that overhead costs are not all related to production and sales volume.
d) Pricing- An ABC system gives management a good understanding of the cost structures of making and selling a wide range of products. Switching to ABC can change cost per unit calculations substantially. If an organization determines prices based on cost using cost-plus pricing, greater costing information will be very useful and prices will change.
e) Sale Strategy- ABC may result in a change in profit margins, with previously high margin products now being seen as less profitable. This can result in increased sales efforts on different products, especially if the sales department is rewarded on the basis of profits.
f) With ABC it is possible to control or manage the costs by managing the activities which underlie them by monitoring a number of key performance measure.
g) Decision Making- ABC can assist in types of decisions such as promoting or discontinuing products or parts of business, re-designing products, developing new products, developing new ways to do business because ABC provide accurate and reliable cost and business activities information.
h) By focusing attention on cost drivers managers will have a better understanding of production activities preformed by the company which will help identify the non value added activities so that they can be eliminated.
Advantages & Merits of ABC
