Advantages of ABC (Activity Based Costing) is a modern manufacturing costing system. It unhides reasons which are difficult to identify using traditional absorption costing. This enables the organisation to improve its efficiency and maximise profits.
1. It identifies activities which are causing the cost consumption. As a result, entity can evaluate the whole activity and make decision on eliminating or improving the activity,
2. It provides valuable information whether the product is a profitable or not. Some products which are assumed to be profitable under absorption costing when analysed using ABC come out to be loss-making. This depicts the true state as overheads are allocated according to the activities.
3. As all the activities of the operations are evaluated in detail, ABC leads to improved performance in processes.
4. It allows better pricing strategy because each product is valued most appropriately.