Some firms have a lot of fixed costs and few variable costs, while other firms are configured the other way around. What effect do you think the existence of a high proportion of fixed costs has on the desirability of using ABC methods?

omsailogistic

The question was one of the conceptual and finest of all asked from ABC costing.
Sol
Now assume two situations. SITUATION 1 where the proportion of variable cost
is higher than the fixed cost.

In such a case, the various variable costs are effeted by their respective cost
drivers resulting in proper allocation of overhead cost among different
products on a logical and consistent basis.
It enables proper pricing of final products and helps in determining cost of
non recurring special orders.

SITUATION 2
Since in this case, the proportion of fixed cost ( in respect of which cost drivers
are not identifiable ) are more than that of variable cost.

We have to make use of traditional method of costing to allocate fixed overheads
to various products or services based on " main factor of production " say
Machine Hours OR Labour Hours, etc.

The prices determined under traditional method of costing is illogical and
sometimes vague.
The adoption of ABC costing is not desirable in this case.

omsailogistic

The simple answer is
The ABC costing is widely used where the semi-variable costs are traceable.
Therefore where the proportion of Fixed cost is more than variable cost, it is not desirable to adopt ABC costing rather use Traditional methods to allocate fixed overheads.
Why not Desirable:
1 since under traditional methods, the overheads costs cann't be logically allocated. we cann't say that the prices of final products are determined on realistic bases.
2 If some special order or Govt orders came, we cann't properly determine the cost
of such orders as fixed cost allocation becomes problem for these orders.