Final answer:
Cost-plus pricing using activity based costing (ABC) offers accurate cost allocation, improved decision-making, and enhanced profitability.
Step-by-step explanation:
Cost-plus pricing using activity based costing (ABC) has several advantages:
- Accurate cost allocation: ABC helps in accurately allocating costs to different activities, which provides a more precise understanding of the true cost of each product or service.
- Improved decision-making: By accurately assigning costs to activities, businesses can make informed decisions regarding pricing, resource allocation, and cost reduction.
- Enhanced profitability: ABC enables businesses to identify cost drivers and eliminate activities that do not add value, leading to improved profitability.
For example, a manufacturing company can use ABC to determine the cost of each production activity, such as machine setup, material handling, and quality control. This helps the company set the price for each product based on the actual costs incurred and make better decisions on how to allocate resources.