Page 245 - F2 - MA Integrated Workbook STUDENT 2018-19

Alternative costing principles

2.2 Advantages and disadvantages of ABC

When compared to other costing systems ABC has the following advantages and
disadvantages.

 Costs are understood better.  Arbitrary cost apportionments are
still required.
 Costs are absorbed better.
 It can be costly to implement.
 Cost control can be improved.
 The choice of activities and cost
 Pricing decisions can be improved. drivers might be inappropriate.

 Decision making can be improved.

 ABC can be used in service
industries.

Test your understanding 1

Which of the following statements are correct?

(i) A cost driver is any factor that causes a change in the cost of an activity.

(ii) For long-term variable overhead costs, the cost driver will be the volume
of activity.

(iii) Traditional absorption costing tends to under-allocate overhead costs to
low-volume products.

A (i) and (iii) only

B (ii) and (iii) only

C (i) and (ii) only

D (i), (ii) and (iii)

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