Explain three (3) reasons when a manufacturing company would consider implementing an activity based costing system.

Expert Solution

Activity based costing

It is basically a methodology to allocate the overhead cost to those items that actually use it.

These cost are a bit more difficult to divide or allocate between products. E.g. Electicity cost, salaries, internet usage etc.

Three (3) reasons when a manufacturing company would consider implementing an activity based costing system:

1. The firm has a highly diverse product mix or service mix : Manufacturer would like to know the exact costing of different products manufactured for correct pricing decisions.

2. Overhead cost makes up a significant percentage of overall expenses : To correctly allocate the costs among different items on the basis of usage.

3. Manufacturing process is capital intensive : For example, construction companies. They have such high investments & overhead cost like equipments, machinery, salaries etc. By using ABC costing method, they can assign the costs correctly to different project like how much time those machines & equipments were used in that particular project and accordingly allocate the cost and make cost competitive decisions

ekkarill92 answered 1 year ago

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