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Discuss the advantages and disadvantages of using activity-based costing.

User Oikonomopo
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Final answer:

Activity-Based Costing offers a more accurate cost representation and helps in reducing overhead costs, but the implementation is time-consuming and costly, which may not be ideal for smaller, less complex companies.

Step-by-step explanation:

Activity-Based Costing (ABC) is a method of assigning costs to products and services based on the activities that go into producing them. A key advantage of ABC is that it provides a more accurate cost representation, leading to better pricing strategies and financial decisions. Companies can identify high overhead costs and find ways to reduce them. However, implementing ABC can be time-consuming and costly due to the detailed tracking of activities. Moreover, ABC may not be as beneficial for smaller companies with less complexity in their operations.

Advantages:

  • Accurate cost representation for pricing and decision-making.
  • Helps identify and reduce overhead costs.

Disadvantages:

  • Time-consuming and costly implementation.
  • May not be practical for small or less complex companies.

User Stephen Woodbridge
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