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How does ABC costing differ from traditional allocation

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ABC Costing

How does ABC costing differ from traditional allocation methods?

What can an organization learn from the process of applying ABC costing?

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

What are some of the characteristics of firms generally benefiting from ABC cost allocations?

Is ABC just a method of allocating overhead costs? If not, discuss.

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Solution Summary

Your response is 530 words and includes three scenarios under which ABC is useful as well as practice examples of how ABC changes behavior and why fixed costs are not well suited for ABC.

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How does ABC costing differ from traditional allocation methods?

ABC separates overhead into homogeneous pools and allocates each separately based on a cost driver thought to cause the overhead to be spent. ABC allocates the overhead pools to job/products/batches based on how much of each activity driver they consume.

Traditional methods use one cost driver to allocate all overhead.

So, the main differences is in the number of cost drivers used to allocate overhead (one = traditional, or more than one=ABC)

What can an organization learn from the process of applying ABC costing?

ABC can be very helpful because it sheds light on who or which product is using overhead resources. For instance, if you have been running the forklifts for 7 hours a day, it might be very interesting to learn that it is mostly from Manager A who likes to have a clean floor and so makes lots of trip back and forth to pick up scrap rather than waiting to the ...

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  • MSc, University of Virginia
  • PhD, Georgia State University
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