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Activity-Based Costing (ABC)

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:

Company A Company B Company C
Direct materials . . . . . . . . . . . . . . . . . . . 7% 21% 42%
Direct labor . . . . . . . . . . . . . . . . . . . . . .13% 42% 49%
Manufacturing overhead . . . . . . . . . . . . 80% 37% 9%
100% 100% 100%
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.

Solution Preview

Company C will benefit the most by converting to ABC. This is because it has the least amount of ...

Solution Summary

The solution explains which of the companies would benefit the most from converting to activity-based costing and how the data determines the answer.

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