Discuss the reasons why activity-based costing may be preferred to Essay

Discuss the reasons why activity-based costing may be preferred to traditional absorption costing in the modern manufacturing environment - Essay Example This paper discusses the various reasons why most firms use activity-based costing methods over the tradition absorption method. There are mainly two costing methods used by companies in different manufacturing environment that include absorption and activity-based costing techniques (Needles, Powers and Crosson, 2011). The Modern Manufacturing Environment involves the use of modern technology in the manufacturing industry. The use of technology enables organisations to reduce the cost of labour and increase production rates. In addition, modern manufacturing environment entails production of large volumes of goods at a cost, which promotes the companys profitability. The primary characteristics of a modern manufacturing environment include the following. First, the manufacturing environment entails an intense competition internationally. Most of the firms that operate on modern manufacturing environment experience high levels of competition on an international platform. For example, companies operating in the automobile industry experience great competition internationally, which require them to reduce production cost in order to initiate cost, based competition strategies (Lembersky and Lembersky, 2005). Secondly, the modern manufacturing environment involves rapid innovation in production. Production innovation is essential in establishing cost effective production methods such as automation of the production line and use of digital systems to reduce the cost of power and labour (Frost, 2005). Thirdly, the environment involves the use of automated machinery, which minimises the cost of labour. Automation of the production line ensures that most of the operations of the company rely on technology, which reduces the cost of production (Lembersky and Lembersky, 2005). Finally, production in a modern manufacturing environment involves