Activity Based Costing Essay Example | Topics and Well Written Essays - 2500 words

Activity Based Costing - Essay Example The manufacturers or service providers can avoid manufacturing of unprofitable products and also they can lower the price of their overpriced products or services using this method. But it is not necessarily that every time the ABC method will bring the positive results alone or in other words the success rate of activity based costing may not be 100% all the time. In this essay, the methodology of ABC, its positives and negatives are all discussed in a brief manner. Each manufacturing units will have often different products. The consumer demand for some of their products may be high while some other products of the same company may not be popular in the market. For example, a tire manufacturing company, most likely to manufacture tires, for passenger cars, trucks, aircrafts and motor bikes etc. It is not necessary for them to have all their products moving in the market equally well. Suppose the car tires manufactured by the company moving excellent, the truck tires moving good, th e motor bike tire moving fair while aircraft tires moving poorly in the market. Because of the variations in demand the volume of the production of different tires will be adjusted by the company. The company will allocate more resources to the passenger car tire building compared to other types of tires. The technology and resources required to manufacture the aircraft tires is more complicated than the others. Lot of complicated processes is involved in the manufacturing of the aircraft tires though its movements in the market are dull. Mostly Activity Based Costing 3 because of the less movement in the market, only few machine activities will be allocated to the aircraft tire by the company. So if the company calculates the price of the tires based on the machine activity alone, the aircraft tire price must be less compared to others because of less machine activity. But since ABC considers all activities related to the manufacturing of a product, both direct and indirect, fixed cost and variable cost, etc, the company can determine the price of each product logically. If enough demand is there, mass production of product can effectively cut down the unit price of the product. China has successfully implemented such a strategy of mass production and