Question

Critically evaluate a consulting group’s recommendation of switching the overhead assignment to an activity-based approach.

Answer 1

Explanation

In changing to activity based costing, there are vatious factors involved in it like its benefits, disadvantages and limitations and effects.

Activity based costing distributes the overhead cost on the basis of cost pools and activity driver rather than traditional method in which either labour hour method or machine hour method is used.

Advantages of activity based costing

1) It gives us the more accurate data for distribution of overhead cost to products

2) It helps in understanding the overhead cost first so that it can be efficiently distributed

3) Activity based costing helps in setting benchmarks

4) This method gives more focus on unit cost rather than total cost

Disadvantages of activity based costing

1) Implementation of this approach require high time, money, training, Resources. It is very resource consuming implementation. Its maintenance cost is high, salary is high since more skilled employees are required to do research.

2) Results of this approach are not in consultation with the GAAP and other standards used worldwide. Hence double time is consumed in making reports.

3) Sometimes results of activity based costing does not suit with the manager performance then often traditional method become relevant in analysing the performance of the managers.