Final answer:
The three essential characteristics of a successful activity based costing (ABC) implementation are that the system must be achievable, relevant, and time-bound to ensure its effectiveness and alignment with broader organizational objectives. Understanding cost behaviors like fixed and marginal costs aids in this process.
Step-by-step explanation:
The three essential characteristics of a successful activity based costing (ABC) implementation are as follows:
- Achievable: The implementation of ABC should be realistic, with clear objectives that can be attained, ensuring that any barriers can be overcome.
- Relevant: The ABC system should align with the organization's other goals and make sense within its operational context.
- Time-bound: There should be a specific target date or deadline for the implementation, allowing for effective planning and timely execution.
These characteristics ensure that the ABC system not only supports accurate and equitable compensation and effort recognition but also facilitates improved decision-making through a solid understanding and communication of cost behaviors, such as fixed cost, marginal cost, average total cost, and average variable cost. This level of adaptability and the ease of interpretation are also significant strengths of using ABC, which can be applied to large scale processes. Nonetheless, challenges can include complexity in maintaining the system and the potential need for substantial initial and ongoing effort to ensure accuracy and relevance.