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Evaluation of Activity-Based Costing

1. Discuss differences between activity-based costing and the traditional costing systems.
2. Discuss the reasons that activity-based costing may be resisted by top management.
3. Discuss why activity rates are important to management.
4. In your opinion, why is the activity-based costing approach probably unacceptable for external financial reports?
5. Answer the question at the end of this case:
The controller of Chicago Company is in charge of installing a new costing system that includes the allocation of indirect manufacturing costs to the producing departments. After studying the situation, he found there were three cost drivers that could be used to assign the indirect costs, each with its own merits. After computing the allocations for the departments on a sample month, he found that each cost driver favored (that is, assigned less costs to) a different department. Machine hours favored Department X, direct manufacturing labor hours favored Department Y, and number of processing steps performed favored Department Z.
- What additional factors must the controller consider before deciding on an allocation base for the indirect manufacturing cost assignment to the departments?

Solution Preview

1. Discuss other differences between activity-based costing and the traditional costing systems.

Activity based Costing (ABC) takes into consideration the cost associated with a product and theoretically will define only the cost of the product. Traditional Costing uses averages or dumped costs to assign as cost of goods without knowledge of the actual cost of the product.

2. Discuss the reasons that activity-based costing may be resisted by ...

Solution Summary

5 Answers to help clarify Activity Based Accounting, sourced from a senior executive opinion

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