Acccounting

Investopedia defines activity based costing as ‘An accounting method that identifies the activities that a firm performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods.’

In other words, as a result of activity based costing it is simple to discover which activities add value to the organisation. Also helps to identify the non-value adding activities which are time, effort and money wasting and eliminate these unnecessary costs being incurred.

There is a range of benefits associated with the ABC approach and this is widely used as one of the most common techniques to help define the activities of the organisation and adding value.

There are a numerous advantages to using activity-based approaches, it recognises the complications faced by many businesses in the modern day which affects businesses having multiple costs. These complications are occurring within Solent Manufacturing Limited due to the business having a wide product range of household goods being manufactured.

It is also considered that activity based analysis provides a more significant breakdown of costs which can provide a better basis for pricing, product mix, design and production decisions. This can help Solent Manufacturing Limited identify the causes of increases in costs and therefore it further helps in reducing them. This method is very easy to understand and can also be used to carry out customer profitability analysis.

Even though there are many advantages associated with activity based costing a number of problems have been identified. It has been argued that the costs of obtaining and breaking down the new information may be time consuming, hence why it has been suggested that activity based analysis should only be introduced when there are necessities within in the...