What are the factors which led to the development of ABC:
1) Traditional costing fails to capture cause and effect relationship
2) Traditional costing often fails to highlight inter-relationship among activities in different departments
3) Growing dissatisfaction among the working executives regarding traditional costing which is based on averages and estimation.
4) Traditional costing systems are driven by the need to value stocks rather than to provide meaningful product cost.
5) Direct labour has shrunk as a percentage of total cost for majority of manufacturing companies. Still it is most common basis of overheads to products.
6) Overhead cost are no long a mere burden to be minimized. Overhead function such as product design quality control customer service production planning and sales order proceeding are as important to the customer as physical processes on the shop floor.
7) Complexity has increased. Product ranges are wider. Product cycles are shorter and demand for quality is higher.
8) Market place is very competitive.
9) Availability of computer has enhanced requirement for improvement in information gathering technology for advanced decision making to gain competitive advantage.