A comparison of the overhead per unit calculated using the ABC and traditional methods often shows v

A comparison of the overhead per unit calculated using the ABC and traditional methods often shows v

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A comparison of the overhead per unit calculated using the ABC and traditional methods often  shows very different results:  Busy Ball Company 20X0 Overhead per Unit ABC Traditional Hollow Center Ball $0.52 $0.35 Solid Center Ball $0.44 $0.53 In this example, the overhead charged to the hollow ball using ABC is $0.52 and much higher than  the $0.35 calculated under the traditional method. The $0.52 is a more accurate cost for making  decisions about pricing and production. For the solid center ball, the overhead calculated is $0.44  per unit using the ABC method and $0.53 per unit using the traditional method. The reason for the  differences is the traditional method determines the cost allocation using direct labor dollars only, so  a product with high direct labor dollars gets allocated more of the overhead costs than a product with 
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Unformatted text preview: low direct labor dollars. The number of orders, setups, or tests the product actually uses does not impact the allocation of overhead costs when direct labor dollars are used to allocate overhead. ABC provides a way to allocate costs more accurately when overhead costs are not incurred at the same rate as direct labor dollars. The more activities identified, the more complex the costing system becomes. Computer systems are needed for complex ABC systems. Some companies limit the number of activities used in the costing system to keep the system manageable. While this approach may result in some allocations being arbitrary, using ABC does provide a more accurate estimate of costs for use in making management decisions....
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A comparison of the overhead per unit calculated using the ABC and traditional methods often shows v

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