The Need for a New Approach

The Need for a New Approach - direct labor, even though...

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THE NEED FOR A NEW APPROACH In recent years manufacturers and service providers have experienced tremendous change. Advances  in computerized systems, technological innovation, global competition, and automation have changed  the manufacturing environment drastically. As a result, the amount of direct labor used in many  industries has greatly decreased, and total overhead costs resulting from depreciation on expensive  equipment and machinery, utilities, repairs, and maintenance have significantly increased. When  there is not a correlation between direct labor and overhead, it is inappropriate to use plantwide  predetermined overhead rates based on direct labor. Companies that use overhead rates based on 
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Unformatted text preview: direct labor, even though this correlation does not exist, experience significant product-cost distortions. To avoid such distortions, many companies now use machine hours as the basis on which to allocate overhead in an automated manufacturing environment. But even machine hours may not suffice as the only plantwide basis for allocating all overhead. If the manufacturing process is complex, then only multiple allocation bases can result in more accurate product-cost computations. In such situations, managers need to consider an overhead cost allocation method that uses multiple bases. That method is activity-based costing ....
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