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abc - product based on the number of set-ups that product...

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Activity-Based Costing As discussed earlier, overhead costs have become an increasingly large component of product and  service costs. By definition, overhead costs cannot be directly traced to individual products. But to  determine each product's cost, overhead must be  allocated  to the various products. In order to obtain  more accurate product costs, many companies now allocate overhead using  activity-based costing   (ABC) . Under ABC, companies allocate overhead based on each product's use of activities in making  the product. For example, companies can keep track of their cost of setting up machines for each  batch of a production process. Then companies can allocate part of the total set-up cost to a particular 
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Unformatted text preview: product based on the number of set-ups that product required. Activity-based costing is beneficial because it results in more accurate product costing and in more careful scrutiny of all activities in the value chain. For example, if a product's cost is high because it requires a high number of set-ups, management will be motivated to determine how to produce the product using the optimal number of machine set-ups. Both manufacturing and service companies now widely use ABC. Allied Signal and Coca-Cola have both enjoyed improved results from ABC. Fidelity Investments uses ABC to identify which customers cost the most to serve....
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