activity based costing

Activity based costing system is the costing system that it will based on the occurred of events to assign to the products and services that involved in the process of providing the product or service. So firstly, it will identify various activities performed in a firm and then, allocated the overhead costs to activities using multiple cost drives and allocate the overhead costs to products and services based on the amount of it consumed of these activities and resources.

For ABC system used of multiple drive however, traditional costing system only based on one cost driver. ABC system able to take account of all the overhead costs such as selling and administrative, marketing and general expenses .The traditional costing systems focus on internal organisation management and are financially-oriented So the firms that operate under contemporary settings may not favourable to use of traditional costing systems due to increasing global competition, advance technological and development of new management system such as total quality management, just in time and flexible manufacturing system. However, ABC could work with other system such as economic value added, total quality management or theory of constraints. In addition, ABC system may able to monitoring the hidden losses and profits compare with the traditional costing system. But for identical output it may not reasonable to implement in ABC system but logical to traditional costing system.

Advantage of ABC is enabling to better management of the resources due to its focus on support strategic decision and ensure the management is effective use of resources. In addition , it able help management to measure product and service costs accuracy than traditional costing system Even though, ABC system have multiple cost drives but it does not require more information than traditional