HRM
For companies that manufacture several products that use different proportions of manufacturing overhead resources, why does the use of activity-based costing provide more reliable product cost information for management decision-making than would traditional costing system that uses a single cost driver to allocate all manufacturing overhead activities/resources? Write your response professionally as if you were responding to the president of your company.
Activity Base Costing
Full Answer Section
ABC is a more accurate costing system that allocates manufacturing overhead costs to products based on the activities that they consume. This means that products that use more overhead resources will be assigned a higher cost, and vice versa. This makes ABC a more reliable source of product cost information for management decision-making.
For example, let's say that we manufacture two products, Product A and Product B. Product A is a high-volume product that uses a lot of machine hours, while Product B is a low-volume product that uses a lot of setup time. Under traditional costing, both products would be assigned the same manufacturing overhead cost per unit. However, this would not be accurate, as Product A is actually using more overhead resources than Product B.
With ABC, we would be able to allocate manufacturing overhead costs to Product A and Product B based on the activities that they consume. This would give us a more accurate picture of the true cost of each product, which would be more helpful for making management decisions.
Specifically, ABC can help us to make better decisions about pricing, product mix, and cost reduction. For example, if we know that Product A is actually more expensive to produce than Product B, we can adjust our pricing accordingly. We can also use ABC to identify areas where we can reduce costs, such as by reducing setup time or finding a more efficient way to use machine hours.
In conclusion, I believe that ABC would be a valuable tool for our company. It would provide us with more accurate product cost information, which would help us to make better management decisions. I would like to recommend that we implement ABC in the near future.
Thank you for your time and consideration.
Sincerely, [Your Name]
Sample Answer
Dear President,
I am writing to you today to discuss the benefits of activity-based costing (ABC) over traditional costing for our company. As you know, we manufacture several products that use different proportions of manufacturing overhead resources. Traditional costing systems allocate all manufacturing overhead costs to products using a single cost driver, such as direct labor hours or machine hours. However, this can lead to inaccurate product costs, as some products may use more or less overhead resources than others.