Final answer:
Activity-based costing is useful for organizations with diverse product lines and significant indirect costs. It provides management with detailed insights into cost drivers and a more accurate cost of products or services. The system also aids in performing cost-benefit analysis for better decision-making.
Step-by-step explanation:
Activity-based costing (ABC) is particularly useful in organizations where product lines are diverse in volume and complexity. This means that ABC is valuable when indirect costs are a significant portion of the total costs, and these costs are not distributed uniformly across all products or services. It is also helpful when the overheads have a wide variation and are not just volume-driven, which is often the case in multi-product, service-oriented, or complex manufacturing environments.
The information provided by activity-based costing systems to management includes better insights into the true cost drivers, as well as more accurate product or service costing. By identifying and evaluating the activities that consume resources and accumulating costs at the activity level, management can make more informed decisions on pricing, product mix, cost control, and process improvements. It also assists in identifying non-value-adding activities that can potentially be reduced or eliminated, leading to improved operational efficiency.
Using ABC, a company can understand its cost drivers and the activities that incur costs. This detailed view allows for cost-benefit analysis where the costs are weighed against the potential benefits to drive business decisions. For example, such analysis might involve comparing the additional costs of producing more units (marginal cost) against the additional revenue those units could generate (marginal benefit).