Product Cost Hierarchy
Importance of Manufacturing Overhead Allocation
The percentages of product costs comprised by direct materials, direct labor, and manufacturing overhead for three companies are as follows:
Company A Company B Company C
Direct Materials.............................. 7% 21% 42%
Direct Labor.................................. 13 42 49
Manufacturing Overhead.................. 80 37 9
100% 100% 100%
Based on this information, which of these three companies would probably improve its product costing accuracy most by converting to activity-based costing (ABC)? Explain your answer.
Product Cost Hierarchy
For the following list of costs, indicate by the appropriate letter which category of activities each cost applies to: unit level (U), batch level (B), product line (P), or facility support (F):
a. Machine fine-tuning adjustment cost (required after the production of each unit)
b. Salary of vice president of finance
c. Machine inspection cost (required after the completion of each day's production)
d. Cost of the external audit firm
e. Direct labor
f. Product testing cost (performed at the start of each day's production)
g. Direct materials
h. Factory security cost
i. Machine straight-line depreciation cost (Generally, machines are dedicated to producing
a particular type of product.)
j. Warehousing cost (Each type of product has its own warehouse.)
k. Employee training cost (Training is generally specific to different types of products.)