Why is Activity Based Costing (ABC) useful in estimating cost to serve specific customers?

 

Why is Activity Based Costing (ABC) useful in estimating cost to serve specific customers?

Activity-based costing gives a more accurate way of product/service allocation, which leads to more accurate pricing decisions. It helps in understanding the overheads and cost drivers; and makes costly and non-value adding activities to be discovered, allowing managers to reduce or eliminate such. Furthermore, it offers the following benefits:

• Provides practical production costs for particular goods
• Allocates overhead production more specifically to goods and processes that use the operation. Identifies dysfunctional processes and goals for change
• Determines the gross margin of the commodity more specifically
• Discover which processes have excessive and wasteful costs
• Provides greater understanding and justification of overhead production costs