Activity Based Costing Pros and Cons

ABC Costing Pros and Cons

A lot of businesses who aren’t already implementing activity based costing in their organization can find it pretty useful if they tried. If they just rely on the plain traditional budgeting system which is still a bit effective but not as much as it used to. It can cause a lot of headaches in certain situations. That’s why adding a tool like activity based costing in their tool box is really beneficial.

For managers using this tool is also quite easy it wouldn’t take you a lot of time to create. Otherwise from doing the analysis and collecting data which can get a bit tedious. But the impact it will have on your organization would vastly out way the time and effort it took you to create it. Although activity based costing is a great tool it also comes with its own problems.

 



Activity Based Costing Pros and Cons
Activity Based Costing Software for Excel

 

They are not huge problems that can destroy your business. But they can still have an impact on your organization’s performance. Furthermore it’s always good to know both the good and ugly.

So that you know the risk that is involved that can affect your business decisions and help you to create a better strategy. Below you can see a list of pros and cons about activity based costing.

Pros

Operations can perform more efficiently

By performing activity based costing, it will allow you to analyze your organization’s operations at much deeper level. It will prevent you from just skimming over the surface and make decisions.

When you have analyzed the different operations you can then find ways to make them perform more efficiently. This will also tend to have an impact on your cost as well and probably driving it a bit lower.

Better pricing strategies

A lot of times businesses usually tend to price a product based off the cost of the operations that went into creating the product. By performing activity based costing, which we all know one of the main reasons of using it was to drive cost lower.

It will allow you to see the true cost of a certain operation instead of making rough estimates. Based off of that cost it will help you to better adjust your pricing strategy to suit customers.

Cons

Will not work every time

When using activity based costing to drive down cost, it’s not going to work every time. Sometimes you will notice that the true cost of an operation should be way higher than you were estimating. Another tip you should keep in mind is that.

When performing activity based costing you must make the decision whether to use a strict budget for a certain activity or add on additional cost to it. In order to give it some space for mistakes if issues does arise and sometimes it will.

Some projects at times are a bit unpredictable, you want to make sure that when mistakes do happen you are more than prepared for it.

Misinformation

Executing activity based costing at times require lots of data to be collected and organized. But it usually depends on your organization’s complexity. With activity based costing you are going to put a fixed budget on a certain activity.

As a result of that you have to ensure that all your data is correct or else you are going to have confusion later on throughout your operations. This a risk a lot of business managers must keep in mind when using this technique.

In summary showing you both the pros and cons. Will help you in deciding whether activity based costing is for you. By looking at the pros and cons above you can see that the positives greatly made it up for the negatives.

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