The advantages and disadvantages of activity-based costing
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What are the advantages and disadvantages of the step-down method of activity-based costing relative to the step-down method of cost allocation?
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Solution Summary
This solution explains the step-down method of activity-based costing and then discusses its advantages and disadvantages, comparing them to the step-down method of cost allocation.
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The step-down method of activity-based costing is a methodology for allocating all overhead costs down to a product cost level in a company that employs several support teams and typically manufactures more than a single product.
Consider a firm that manufactures both wooden tables and metal tables. The portion of the plant that makes wooden tables is labor-intensive and requires a large workforce. The metal table division is full of robotic welders and very few employees. The firm has both a human resource department and an engineering department, the costs of which must be accurately allocated to each product made. Because the wooden table division is so ...
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