Implementation of ABC is cost effective when when variable production costs are a low proportion of total production costs while overhead costs costs ( assumed to be fixed costs) are a large proportion
can someone please explain this?
under traditional or abc, we just allocate the costs on certain types of activities right?
so how is using abc more effective in certain cases?
i thought abc is more meaningful
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PMhow is abc more effective?
As I understand, using Traditional allocates more overheads to high volume production regardless of how these units are produced.
ABC suggests that 2 products with same unit amount aren't going to cost the same (if one has to go through more machines for example, that would be an activity which adds cost).
So as I gather it is more effective if you have a system where you have wide range of products going through variable different processes.
The reason for this development is that once upon a time factory operations were simpler, labour and machinery was the main thing. Now we have wide range of factory machinery and wide ranges of overheads such as delivery couriers and different packaging procedures for different products. So simply basis everything on how many units your produced is a less reliable formula
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