Activity-based costing is not typically used for external reporting because activity-based costing is primarily used for internal decision-making with cost management within an organization. some following reasons activity-based costing some times is not used for external reporting such as complexity, external reporting requirements, consistency and comparability, relevance to external users, deviation from established accounting standards, lack of consistency, widely accepted costing methods that provide simpler and comparable information.
Activity-based costing provides detailed analysis, identification of activities, and allocation of cost drivers based on cost. ABC is not every time practical or necessary for external reporting purposes. in activity-based costing simplicity and comparability are prioritized. in external reporting which are financial statements prepared for stakeholders and also regulatory bodies which are follow established accounting standards and frameworks such as GAAP- generally accepted accounting principles or IFRS- international financial reporting standards. these two standards prescribed specific rules and guidelines for reporting financial information to external stakeholders and also include investors, creditors, and regulatory bodies.
External financial reports such as income statements, balance sheets, and statements of cash flow are usually prepared for the traditional costing method such as absorption costing or direct costing method. These two types of methods allocate the cost based on simpler and more straightforward measures such as direct labor hours, machine hours, or material costs. ABC makes complex in nature and it is less suitable for external reporting purposes. external financial reports require a standardized and consistent approach for comparability and transparency across different organizations. some times organizations choose to disclose information about their costing methodologies. in the footnotes or supplementary section of their financial statements.
