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Activity Based Costing (ABC)

Activity-Based Costing (ABC) is a managerial accounting method that assigns certain indirect costs to the products incurring the bulk of those costs. Many large businesses, especially in the manufacturing sector, use this kind of costing system to accurately price their product. But, even Small businesses could greatly benefit from this. 


Advantages and Disadvantages of Activity-based costing:

Advantages: ABC for small businesses is a great way to calculate overhead decisions and pricing products. ABC system helps you understand how Overhead is used, which helps you determine whether activities that are costing more than they should be substituted or cut off.  You can assign costs to each activity in the production process, allowing you to set a price more accurately.


Disadvantages: Many companies forgo ABC because an improper implementation can exceed the cost of implementing it more than the benefits gained from using it.

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