In the first step - of the overhead cost inaccurate product...

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In the first step (ABC method) the company allocates overhead costs to activity cost pools. In this  simplified example, the company has identified four activity cost pools: purchasing, storing,  machining, and supervising. After the costs are allocated to the activity cost pools, the company uses  cost drivers to determine the costs to assign to the individual products (either axles or steering  wheels) based on each product's use of each activity. For example, if axles require more activity by  the purchasing department, as measured by the number of required purchase orders, then more of the  overhead cost from the purchasing pool will be allocated to the axles. The more complex a product's manufacturing operation, the more activities and cost drivers it is  likely to have. If there is little or no correlation between changes in the cost driver and consumption 
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Unformatted text preview: of the overhead cost, inaccurate product costs are inevitable. Illustration 17-3 shows the design of a more complex activity-based costing system with seven activity cost pools for Lift Jack Company. Lift Jack Company manufactures two automotive jacks— an automobile scissors jack and a truck hydraulic jack. Illustration 17-3 ABC system design—Lift Jack Company The Lift Jack Company illustration contains seven activity cost pools. In some companies the number of activities related to a cost pool can be substantial. For example, Clark-Hurth (a division of Clark Equipment Company ), a manufacturer of axles and transmissions, identified over 170 activities. Compumotor (a division of Parker Hannifin ) identified over 80 activities in just the procurement function of its Material Control Department....
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In the first step - of the overhead cost inaccurate product...

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