Final answer:
Managers typically use activity based costing when detailed allocation of indirect costs is necessary, for firms with high overhead or for those experiencing sharp changes in marginal costs. It is essential for accurate long-term financial planning and for making informed production and pricing decisions.
Step-by-step explanation:
When Managers Typically Use Activity Based Costing
Managers typically use activity based costing (ABC) when they need a more accurate method of allocating indirect costs to products or services. This method is particularly useful for firms with high overhead costs that need to be distributed fairly across different lines of products or services. For instance, companies such as an internet medical advice website with substantial fixed costs upfront and low marginal costs for additional services would benefit from ABC to understand the true cost of delivering services. Similarly, manufacturing plants with high operational demands leading to increased marginal costs, due to factors like the need for maintenance of overworked equipment, can also apply ABC to gain accurate cost insights. The application of ABC provides a means to analyze the linkage between the science behind a technique and the cost of implementing it, considering all costs from materials to maintenance.
It's crucial for firms from various industries to discern their cost structures from a long-run perspective, breaking down total costs into fixed and variable costs. These calculations then form the basis for average total cost, average variable cost, and marginal cost calculations. Activity based costing comes in handy when these basic cost measures need to be analyzed intricately for effective decision-making regarding production quantities and pricing strategies in alignment with the market structure the firm operates within.