Activity-Based Costing is a method that has become widespread in European and American enterprises of various profiles. The emergence and development of ABC corresponded to specific changes in the economic structure, namely, a change in views on the methodology of cost accounting and the calculation of the cost of production. In Activity Based Costing, an enterprise is considered as a set of work operations.
This analysis is appropriate since it is vital to create a reliable system at the enterprise that will allow obtaining the necessary information at a reasonable price. I agree with the analysis of the pitfalls of this method in the article, as they may represent obstacles to the more efficient operation of the company. For example, some additional criterion is required for the conditional distribution of costs at the stage of forming a group of expenses such as rent, local tax, depreciation (Kaplan and Anderson). It is unlikely that one cost carrier will explain the behavior or cost dynamics for all storage and accounting objects in the associated cost group.
On the other hand, the number of cost groups and cost carriers cannot be huge; otherwise, the ABC system will be too complex and expensive. Cost carriers will be unsuitable if the resulting costs do not depend on the output (Cidav et al.). For example, it is problematic to quantify the type of activity that may cause the costs of an annual external audit. Nevertheless, the ABC system can become a universally applicable cost calculation method for several reasons despite some disadvantages. The ABC system focuses attention and contributes to a better understanding of the factors that affect the costs of organizing production and managing it (Cidav et al.). In addition, this method is relevant to all overhead expenses, and therefore it takes management accounting to a higher level, beyond the traditional boundaries of the production process.
ABC can be used together with the analysis of profitability by customers to determine the amount of profit received from servicing certain groups of customers with greater accuracy and reliability. Thus, the ABC method has made a significant contribution to management accounting, and its elements have found application in life (Kaplan and Anderson). Its use will make it possible to perform more effective decisions in marketing strategy, the profitability of products, etc. because it allows controlling costs at the stage of their occurrence.
Works Cited
Cidav, Zuleyha, et al. “A pragmatic method for costing implementation strategies using time-driven activity-based costing.” Implementation Science 15 (2020): 1-15. Web.
Kaplan, Robert, and Steven Anderson. “Rethinking Activity-Based Costing.” Harvard Business School. Web.