Activity Based Costing Advantages and Disadvantages

Activity based costing or known as ABC has been a big help to every organization or company who will be having any activity either for business purposes or for team building. Lots of entrepreneur is using this costing methodology in order to ensure that the cost to be allotted to a certain activity is enough and will not be encountering any shortcomings. This is the best way to have an estimate of the cost to be incurred.

What is Activity Based Costing?

Activity based costing is a methodology that is helpful for companies or institutions to identify the activities and assign the cost for each activity; cost estimate is being done in this methodology. Tracing the consumption that is to be spent is the main concern of this costing methodology which has gained the interest of entrepreneurs. This is not just about saving money but utilizing the resources in the most productive way.

There are lots of advantages that this costing methodology has been offering to entrepreneurs for them to be able to be globally competitive and successful in their chosen venture.


The following are the advantages that can be enjoyed if ABC is to be used and implemented

1. Allows the company or the business institution to have the most accurate costing of the products/services. Since this method is primarily focused on the costing of the products or services this is best done with accuracy because the entire process is being monitored thereby allowing the company to have known the cost which is friendly to both the manufacturer and to the consumer.
2. Easier to be understood. This method or approach does not require a deeper way of understanding. It is never hard to be understood since this is focusing on the reality how the process is being undertaken.
3. The unit cost is properly utilize rather than its total cost.
4. Is helpful in the integration of continues improvement programs for the company.
5. Benchmarking is being facilitated.
6. Performance management and scorecards are being supported.

Even though this methodology has been offering lots of benefits, still it has its downside that every entrepreneur should know for them to be able to make the right responses when a problem strikes. Being knowledgeable with it disadvantages would help an individual to equipped themselves as they continue their pursuit.


The following are the disadvantages that limit the entrepreneur:

1. Substantial resources are required since the implementation of this methodology is considered as a major project. This system seems to have been costly if being implemented because there are numerous measures that need to be undertaken to ensure that the company will be ripping the maximum benefit derived from its use.
2. The use of activity based costing produces product margins which are considered odd to the numbers that is being produced by the traditional costing system.
3. The data’s which are being gathered with the use of ABC could have been misinterpreted. This problem would only be prevented to occur if the input of data or figures is being done with precision and care. The data’s are the one that serves as the basis for the decisions that is to be done by the managers.