Minor Medical Company is a manufacturer of blood pressure monitors, catheters, surgical instruments, and other medical products. In each of the past five years, Minor has added approximately 10 new products to its sales. Although its product line has become more diversified and its manufacturing process more complex, Minor continues to apply overhead costs using a single activity base -- direct labor hours.
Explain why activity-based costing would benefit this company.
In this situation where the company has a diversified product line and is subject to complex processes, and where products are subject to quite different processes and efforts, using direct labor costs or any other single activity base in applying overhead costs would assign costs to the different products inaccurately. Different products may consume resources quite differently. In this case, using activity-based costing (ABC) to assign overhead costs may be a better choice for the company. It works in the following way:
<br>1. Identify significant activities in the ...