It is argued that the Activity Based Costing approach produces more accurate product cost information. Critically evaluate the strengths and weaknesses of this statement.

Before the 1980s, majority of the companies were manufacturing units, producing a limited straddle of products, with material and get off labour being the paramount follow. Since bang costs were low and information computing costs high, the companies were at ease using conventional product costing methods. The emergence of the 1980s, brought with it intensifier competition across the globe and growing importance of overheads spot that of direct labour declined (Drury, C., pp 225). Also there were problems that were being set about with traditional cost systems. The use of traditional costing belong to a distortion of data as it allocated indirect manufacturing costs by using volume-related formulae. These formulae were actually based on direct labour or direct material and the percentage contributed by these costs towards the product or service was a relatively small amount. The information thus provided by these systems was inaccurate and trey to incompetent decisions being taken on account of matters much(prenominal) as capital investment and product policy. The information would likewise misdirect the management in terms of the financial home of the company, this lead to decline in profit (Macintosh, N.B.).

Therefore the changing corporate environment and problems with the traditional costing systems brought about a need for an alternative cost system that was both innovative and sophisticated.



This alternative as suggested by Cooper and Kaplan (1988) was Activity Based Costing ( alphabet) based on the following theory (Harvard Business Review (1988)):

Virtually all of a companys activities subsist to support the production and delivery of todays goods and services. They should therefore all be product costs.

Further on they published a series of articles that explained the key ideas that supported first principle type systems. These articles lead to an appreciable amount of popularity and implementation of ABC by a number of companies, so much so that a...

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