Advantages and Disadvantages of Activity Based Costing with Reference to Economic Value Addition - Research Paper Example

A large number of companies have converted to the ABC system since as far back as 1980 as the system has shown its usability in the appropriate product mix decision, overhead management, etc. (Roztocki 2000) (Reyhanoglu 2004)Advantages of an Activity Based Costing System:The first and most important advantage is the accuracy in the process of costing with regards to the product line, the end-users of the product, the stock-keeping units employed by the management and the channel and category which streamline the flow of the product from the producer to the end-user.

This system better assists in the process of understanding the concept of overhead costs i.e. the allocation of common business resources as they are used by specific product lines and their relation to specific cost drivers.This process allows companies to implement costing strategies across another diagonal of the firm as business processes, supply chains, and value addition channels are ably and optimally analyzed in this process.Review the shortcomings of traditional absorption costing and how ABC can help overcome those shortcomings, which can be derived from a conceptual and empirical perspective.

We will perform a walk-through on the company, which aims at comparing and evaluating the results under the traditional costing method and ABC. The discussion will also be spent in this area, the details of which can be derived from the site visits, management interviews and the study of the accounting system and cycle. We aim to obtain some raw data inputs for applying the concepts we found previously from the literature review.In the People’s Republic of China, the demand for motor vehicles and related products such as tire has been increasing over the last few years.

However, the profit margin in the Tyre Manufacturing Industry is unimpressive. Review the shortcomings of traditional absorption costing and how ABC can help overcome those shortcomings, which can be derived from a conceptual and empirical perspective.