Traditional (GAAP) costing methods are best suited to "situations with secure markets, large scale production with unchanging specifications, and little pressure for a highly flexible response to changing market demands". In the absence of any need for flexibility, its simplicity and the inexpensive collection of data make traditional costing methods ideal but this setting for a management accounting system, of which the costing system is a part, is becoming less common. For a firm to consider undertaking an ABC exercise or implementing an ABC system it is inferred that ABC information will overcome at least some of the limitations, or fill a void, of the existing system. Therefore, it is crucial to identify what limitations or void exists.
The intent of introducing ABC methods must be to eliminate experienced (or anticipated) problems.
Ideally traditional costing methods are used in an environment of stable markets and standard products that are made in bulk over lengthy periods. A requirement of flexibility in any form diminishes the relevance and reliability of information produced by traditional costing techniques. However, in the absence of any need for flexibility, their simplicity and the inexpensive collection of data make traditional costing methods preferable as minimal benefits from sophisticated costing methods would not match the higher cost.
Activity-Based Costing provides the sophistication required to…