Question

Firms today are beginning to use techniques such as activity-based costing to more accurately allocate costs to customers based on the specific costs of servicing a customer’s orders relative to how, how much, what, and when a customer orders.

Answer 1

Activity Based Costing is more accurate than traditional costing methods such as Marginal and Absorption costing, especially when orders can be customized.

Step-by-step explanation:

Traditional costing methods focus on Labor and material costs but in the modern business environment, overheads can be substantial and sometimes even more than the cost of labor and materials.

Activity Based costing allocates cost more accurately by considering how cost is incurred and absorbs the cost based on this. It also recognizes that some orders require customization, making their cost totally different from similar orders. This is a more detailed approach to calculating cost than traditional costing methods that assume that orders are generically made in a long production line.