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Activity based costing is used in companies that have large volume of indirect costs for better allocation of these indirect costs to its related activities
Because the ABC providing us the information for eliminating or reducing nonvalue-adding activities, and provide us better cost control and more efficient operations.
Activity-based costing determines every activity associated with producing an item and allocates a cost to the activity.
ABC method helps the organization in control the cost and to acheive the maximum level of output with the minimum of Inputs..
Whether you realize or not, your cost control system may be becoming more and more distorted. At the heart of this distortion is an enormous escalation in overhead costs. According to Robin Cooper, a well-known authority on cost control, many organizations are experiencing super-variable costs within fixed overhead. For example, support staff and programming are exploding for many companies with projects like Enterprise Resource Planning. These types of costs are often classified within traditional cost systems as administrative overhead. Traditional systems allocate these costs based on a single relationship to numerous cost centers. Some experts refer to this traditional approach to cost allocation as "peanut butter" accounting. The end result is an enormous distortion in cost allocation to various cost centers.
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