International Insight - overhead allocation forces Japanese...

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  International Insight Paul Chesley/Stone/Getty Images. Activity-based costing was pioneered in the United States:  John Deere Company  coined the term  about 25 years ago. Numerous well-known U.S. companies, including  IBM Hewlett-Packard Tektronix Hughes Aircraft Caterpillar , and  American Express , have adopted  ABC. Its use outside the United States is limited. The cost of implementation may discourage some  foreign companies. In Japan, where activity-based costing is less widely used, companies prefer volume measures such  as direct labor hours to assign overhead cost to products. Japanese managers are convinced that  reducing direct labor is essential to continuous cost reduction. Using direct labor as the basis for 
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Unformatted text preview: overhead allocation forces Japanese companies to watch direct labor more closely. Possibly, Japanese management believes that labor cost reduction is more of a priority than developing more accurate product costs. Why does using direct labor as the basis for overhead allocation result in lower direct labor costs for Japanese companies? Answer: Managers want to minimize the amount of overhead that is allocated to their product. If overhead is allocated based upon the amount of direct labor used, then managers can minimize the amount of overhead allocated to their product by minimizing the amount of direct labor they use....
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