Share
Explore BrainMass

Activity Based Costing -- better than traditional?

Discuss and illustrate the process of activity-based costing (ABC). Do you view ABC as an improvement over traditional methods? Explain.

Solution Preview

Discuss the ABC process

ABC is a process of sorting overhead into homogeneous cost pools. Each pool is then assigned a cost driver (allocation base) used to spread the overhead costs in that pool to the jobs or products being produced.

Example:

Moving materials..................$40,000
Supervision and training.......$50,000
Equipment related............$100,000
Quality control.......................$20,000

Total overhead........................$200,000

Traditional methods would use one cost driver (allocation base) and spread the entire $200,000 using one driver, perhaps direct labor hours or hours of machine use. In ABC, each of the above four portions of overhead would get ...

Solution Summary

Your tutorial is 428 words. The response gives you an example of four overhead pools and cost drivers for each pool. The process is described in everyday language suitable for a novice. Then, the response gives you the circumstances under which traditional is likely better and when ABC is beneficial.

$2.19