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ABC[1] - Phase 1 Discussion Board ACCT 624-1002B-01 Lavish...

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Phase 1 Discussion Board ACCT 624-1002B-01 Lavish Lamps would like to implement an activity based costing system therefore they have asked for some guidance in doing so. The plant manager would like me to look over a list of the plant’s key activities and relay the cost object and cost driver of each activity back to him. After the cost driver and cost activity has been identified he would like for me to suggest how these costs could be allocated to the lighting fixtures that the plant manufactures. I believe that the manager would benefit from a brief overview of activity based costing, cost objects, and cost drivers. An explanation of these items will help him to better understand what my recommendations have been based upon. An activity based costing system if applied correctly can offer the company greater accuracy in product costing. Activity based costing is a costing method that assigns cost to activities based on their resources rather than their product or service. This method allows costs to be more accurately distributed to the products in which uses them. The concept behind activity based costing is to find the root cause of the overhead and then assign those costs to the products or services that are driving those costs. With traditional costing methods overhead is applied according to machine hours which can result in a product with few machine hours to be charged with an inappropriate amount of overhead. Activity based costing seeks to eliminate this problem. A product that is run on fewer machine hours may have longer setup times therefore may have the need for more overhead to be assessed and products that run on longer machine hours may require less setup therefore less overhead should be assessed (Activity Based Costing and Overhead, n.d.).
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A cost driver can be referred to as an activity that causes costs to change over time. A good example of a cost driver would be the production level of a specific product. The production level would be the cost driver for material costs because as production levels increase
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