Inaccurate product costing can lead to unrealistic strategic focus and pricing, ineffective management decisions and resource allocation, inaccurate inventory valuation, and lost competitive position and advantage.

For example, Friends Corporation may change its marketing and production priorities to sell more units of product GSV because this product provides a better return on sales.

Companies likely to benefit from ABC are those with:

1. Relatively high factory overhead costs
2. Complex operations (i.e. products or services with various production volumes and requiring many diverse activities)
3. Operations that undergone significant technological changes

Even though both manufacturing and service companies can benefit from an ABC system, service businesses might have more difficulties implementing an ABC system. First of all, service companies tend to have a lot of facility-level activities and costs that are difficult to allocate to specific service units. In addition, service companies’ employees often engage in many non-uniformal activities for which it might be challenging to collect cost data. Nonetheless, activity-based costing has been implemented by various banks, health care providers, and insurance companies. Examples of companies using ABC are: American Express, Cambridge Hospital Community Health Network, the City of Indianapolis, Dana Corporation, GE Medical Systems, Hallmark, ITT Automotive North America, Pillsbury, the U.S. Immigration and Naturalization Service (INS) and the U.S. Postal Service.

ABC can be used not only to improve product pricing, but also to improve the value of products or services to customers, which could help to increase the firm’s profitability. After developing an ABC system, a firm’s management can utilize such tools as activity-based management (ABM) and customer profitability analysis discussed in other accounting tutorials.