When Is Activity-Based Costing Appropriate?
Activity-based costing is especially useful to allocate indirect costs to items that are difficult to track and assign. The main benefit is more accurate product overhead costing. However, the main drawback is the time involved to analyze and define activities and resources, restructure the chart of accounts, and set up activity-based costing. All industries can benefit from activity-based costing. This becomes even more critical as the direct labor portion of your product costs decreases, while overhead and administrative costs increase.
Activity-based costing is also appropriate for many service-oriented activities, such as product warranty and claims, engineering and design support, customer service operations, and maintenance operations.
