Question

Sam and Dave own a small manufacturing company that makes all types of hunting gear from decoys to garments. Sam is concerned that products are not being charged the correct amount of overhead and suggests they use ABC for allocating overhead. Dave thinks they are too small to use ABC and that it will cost more than it is worth. How do you advise Sam and Dave? Please make 300+ words

Answer 1

Activity based accounting (ABC) assigns producing overhead prices to merchandise in a very additional logical manner than the normal approach of merely allocating prices on the idea of machine hours. Activity based accounting 1st assigns prices to the activities that area unit the important reason for the overhead. It then assigns the value of these activities solely to the merchandise that are literally exacting the activities. Activity based accounting (ABC) uses many value pools, organized by activity, to apportion overhead prices. (Remember that plant wide allocation uses one cost pool for the total plant, and department allocation uses one value pool for every department.) the thought is that activities area unit needed to provide products—activities like getting materials, fixing machinery, collection merchandise, and inspecting finished merchandise. These activities are often pricey. therefore, the value of activities ought to be allotted to merchandise supported the products’ use of the activities.

Activity based accounting has mature in importance in recent decades as a result of:

(1) producing overhead prices have inflated considerably,

(2) the producing overhead prices now not correlate with the productive machine hours or direct labor hours,

(3) the range of merchandise, and therefore, the diversity in customers, demands have mature,

(4) some merchandise area unit created in giant batches, whereas others area unit created in tiny batches.

Activity based accounting edges the cost accounting method by increasing the amount of value pools which will be accustomed to analyze overhead prices and by creating indirect prices traceable to sure activities.

In my opinion Sam and Dave ought to use ABC analysis as a result of to avoid the extra concern with ancient costing approaches this technique will apportion the costs that are based on the concept that activities are the causes of the costs. The ABC method may end up to enhancements in cost control and provide opportunities for reducing price and improved potency. The ABC method initially assigns costs to activities and subsequently assigns them to products based on the product's consumption of activities, therefore offers correct image of wherever discrepancies lies. In this case Dave features a small business and may cost more than it is worth which may be true, therefore it should weigh the benefits of more accurate cost information versus the cost of obtaining the information. ABC costing method is way additional careful and may offer additional correct numbers for higher cognitive process to Sam and Dave.