(a) Characteristics of an organization contributing to the use of activity based techniques

Activity Based Costing (ABC) is a costing methodology used to trace overhead costs directly to cost objects, i.e. products, processes, services, or customers. Costs are assigned to specific activities (e.g. engineering, manufacturing or purchasing) based on their use of resources and costs are assigned to cost objects based on their use of activities. ABC recognizes the causal relationship of cost drivers to activities. ABC techniques enable a business to decide which products, services, and resources are increasing their profitability, and which are contributing to losses.

Certain organizations appear to be more successful in implementing ABC than others. ABC helps the managers in these organizations to make the right decisions regarding product mix, pricing, process improvements and product designs. Closer look reveals characteristics of an organization such as structure, product range or environment contributing to these successes.

Cost Structure

Where overhead costs comprises major portion of product costs as compared to direct costs such as direct labour and direct materials, correctly attributes overhead costs to product is highly important. In modern business, service departments plays a more and more important role than in the past in which production department is mainly responsible for key manufacturing activities. Overall product and service costs are more influenced by research, materials handling, procurement, equipment maintenance, quality control and customer service requirements than by direct labor or direct materials. Therefore, ever-increasing cost of these service departments must be traced to the final product so that correct pricing and product mix position can be made. ABC is certainly excels traditional costing method which distribute