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Factors that led to the emergence of Activity Based Costing

Activity Based Costing is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.

Activity Based Costing (ABC) was developed by Professors Cooper and Kaplan during the 1980 to address the
associated problems with the traditional system.

The main factors that led to the emergence of ABC were:

The traditional system was developed at a time when direct costs were the dominant costs and overheads
were insignificant in the overall cost of a product. This situation had now reversed.

Companies were now producing a wide range of products and ABC facilitated the true cost/profitability of
products been established.

Companies were now competing on a global market, with cost considerations been very important.

Product had a short life cycle and therefore it was important to validate if products could recover costs
incurred.

5 thoughts on “Factors that led to the emergence of Activity Based Costing”

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