The Importance of Manufacturing Overhead Allocation
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Importance of Manufacturing Overhead Allocation:
The percentages of product costs comprised by direct materials, direct labor, and manufacturing overhead for three companies are as follows:
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Company A Company B Company C
Direct materials . . . . . . . . . . . . . . . . . . . 7%................... 21%........................42%
Direct labor . . . . . . . . . . . . . . . . . . . . . . 13%................. 42%........................49%
Manufacturing overhead . . . . . . . . . . . . 80%..................37%........................9%
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100% 100% 100%
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Based on this information, which of these three companies would probably improve its product costing accuracy most by converting to activity-based costing (ABC)? Explain your answer.
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Solution Summary
This solution provides answers to questions regarding activity-based costing.
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Activity-Based Costing (ABC) is an accounting technique that allows an organization to determine the actual cost associated with each product and service produced by the organization without regard to the organizational structure. Activity- based costing can be used to identify discrete activities as well as identifying the primary output measure for each activity. With using activity-based costing there are value added-activities and non- value added-activities. Value added-activities are activities which customers are willing to pay for or show that after the process there will be a profit. Non- value activities are activities which customers are not willing to pay for or activities that do not show future profit. The ...
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