Discuss some of the factors that could motivate an organization to implement activity based costing

Answer 1

Some of the motivational factors are:
1 . Number and diversity of products or services produced--The greater the number of products manufactured as well as the diversity, the greater need there is for a costing system that can accurately assign overhead costs to products and services. Organizations have a need to know how much their products and services really cost where they can price these goods and services accordingly.
2 . Diversity and different degrees of support services used for different products. The degree of support service may differ from the complexity of the product; with a traditional costing system, these costs may be misallocated.
3 . Extent to which common processes are used--In many organizations, more than one product may require the same process. Traditional costing systems allocate these costs based upon volume of production. However, this may not be the actual way in which resources are used.
4 . Effectiveness of current cost allocation methods--Cost allocation methods should reflect changes in products or processes. However, many organizations fail to take these changes into account, and have costing systems that no longer accurately measure costs of products or services.
5 . Rate of growth of period costs--If an organization has an increase of costs that are being expensed as they are incurred (such as R&D costs), these costs should be measured by the system and allocated to the products to which they are related. This may violate GAAP for external reporting purposes, but the information provided by ABC is useful for internal planning.
6 . Changes in business environment--Changes in the competitive environment or in management strategy could motivate an organization to implement ABC. For example, continuous improvement is enhanced by the use of ABC, because it enables an organization to identify NVA activities and eliminate their causes.