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Statement 1: “Activity cost does a better job of allocating both direct and indirect cost than traditional methods”

The statement one is true. Costing is done in businesses to determine the cost of manufacturing any product or services and calculate the profit generated by the product or the services provided.  Basically, there are two methods traditional method and activity based costing (ABC) that allocates the indirect costs to the products or services.  Assigning of costs is based on adding the resources used by these activities and the activities that go along with them (Business Case Analysis, 2017).
Presently, more and more companies are moving towards ABC method to get a better understanding of goods and services.  Traditional costing is easier mode as it relies solely on adding average overhead costs and thus may distort or hide information.  On the contrary, ABC is more accurate as it provides more detailed and precise breakdown of indirect costs.  Business schools are more inclined towards using ABC to identify products that are not profitable, to improve the efficiency of products, eliminate the unnecessary overheads, and help in accurate breakdown of cost information.

Statement 2: “Activity cost cannot be applied in a business school”

Activity costs cannot be applied in business schools is untrue. ABC can help business schools accurately calculating the cost of services. It can enable business schools in identifying annual fees. At times traditional costing ends with significant over costing or under costing. ABC and traditional accounts ultimately assign direct and indirect costs but calculate it differently. ABC provides detailed information that facilitates planning, designing, implementing which ultimately brings improvements and drives profitability. ABC demonstrates where to adjust pricing by revealing unnecessary or inflated costing. Thus, it can be said that ABC does better job of allocating prices. Although, it is complicated and expensive but gives precise detailing of costs which can prove to be beneficial in planning and in making evaluation of processes and making improvement initiatives (Wilkinson, 2013).

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