Reference no: EM132612246

The benefits of Activity Based Costing in this case are as follows:

1. Activity Bases Costing enables you to analyse the cost of the product accurately and as a result leading to more accurate pricing decisions.
2. It enables us understanding all the overheads and cost drivers so that we can avoid all the unnecessary costs which are leading to high pricing of the product.
3. Activity Based Costing also helps us to provide a more precise breakdown of indirect costs which ultimately helps us to avoid the illegitimate costs.
4. Activity Based Costing makes the costly and non-value adding activities more visible, allowing managers to reduce or eliminate them.
5. It also enables the management in decision making by analysing the cast and revenue relationship of any product.
6. In the above case, the company's profits are declining and the manufacturing people along with the management accountant are considering the conventional costing as a reason for the declining profits. Therefore, it is very important to implement the Activity Based Costing in order to determine the actual reason for the declining profits.

The Cost and Limitations of the Activity Based Costing in this case are as follows:

1. Activity Based Costing is not suitable for Small Manufacturing firms as the cost of implementing the Activity Based Costing is higher compared to cost of conventional costing method.
2. If correct activities are not determined than the cost determined through this method will not give accurate results with respect to cost of the products.
3. It is almost impossible to allocate all overhead costs to specific activities.
4. The choice of both activities and cost drivers might be inappropriate which will ultimately result in the incorrect costing of the products.
5. In the given case, Activity Based Costing should be implemented only if the company has enough points supporting the same and along with that the company has funds to implement the same.

Problem 1: Analyze for craving that outlines the benefits, costs and limitations of Activity- based costing for the case that is in the picture