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The benefits and limitations of Activity Based Costing, explained by our Melbourne small business accountants

Our Melbourne small business accountants define Activity Based Costing as a costing method that allocates overhead costs on the basis of activities that drive costs. In an Activity Based Costing system, activities are assigned to products in two stages: identification of activities and identification of cost drivers. Below our small business accountants in Melbourne have listed the benefits and limitations of Activity Based Costing.

Benefits of Activity Based Costing
Our business accountants have analysed the difference between volume based and Activity Based Costing and have establishing the following benefits for activity based costing:

- Increases the accuracy of costs
- Allows for better control of costs as costs are better identified
- Allows for better decision making by managers and provides opportunities for continuous improvement

Limitations of Activity Based Costing
Although there are numerous benefits, Activity Based costing also has a few limitations which our small business accountants in Melbourne CBD have pointed out below:

- Can be expensive to implement and maintain
- More time consuming than a traditional costing system
- If the market dictates prices, the system may be of little value except for planning and cost-reduction efforts

For more information regarding Activity Based Costing, please contact our Melbourne small business accountants.