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    Manufacturing Overhead Allocation

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    The percentages of product costs comprised by direct materials, direct labor, and manufacturing overhead for three companies are as follows

    Company A

    Direct Materials 7%
    Direct labor 13
    Manufacturing overhead 80

    Company B

    Direct Materials 21%
    Direct labor 42
    Manufacturing overhead 37

    Company C

    Direct Materials 42%
    Direct labor 29
    Manufacturing overhead 9

    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

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    Solution Preview

    ABC helps in allocating the overhead costs correctly. A firm which has high overhead would benefit more than a firm with low overheads. This is because there is a ...

    Solution Summary

    The solution explains what kind of company would benefit from adopting an activity based costing system.