Abstract
The Benefits of Implementing an Activity-Based Costing System
By: David Hruska
Activity-based costing systems allow businesses to gain a competitive advantage by
allowing them to lower costs while still maintaining excellent customer service and product
quality. ABC systems allocate indirect costs based on a product’s cost driver, which is the factor
that creates the cost. This provides a huge advantage over businesses that still use traditional
costing systems, which assign manufacturing overhead costs to units produced, because activity-
based systems more accurately calculate the cost per object being produced. Activity-based
costing also gives management better control over price and product mix, which can help a
business shift away from less profitable products while pushing them toward those products that
generate higher profits. By assigning costs to activity centers, businesses are able to gain a better
understanding of cost structure, which enables them to better predict future budgets and costs.
Creating an ABC system can require a significant amount of resources, which is often the major
barrier that prevents some smaller companies from implementation. That upfront cost is one of
the lone disadvantages to a system that I believe cuts costs at every other level. Despite this
drawback, ABC systems should be implemented by any company looking to gain an advantage
in the marketplace because of the transparency that they provide over other costing systems.