Question:
Simpson Brothers Manufacturing Company has been starting a traditional overhead allocation method to allocate costs to products since the company began. Though operations have been running fairly smoothly, the owners have been wondering if they could investigate a new method known as ABC costing. Some of the company's products are highly labor-intensive, while others are manufactured using highly automated production lines.
They like the sound of the name, but they don't mean in what way the method differs from the method they already use. The method they use allocates overhead based on labor hours used for every product. Since labor is certainly an "activity," they are having trouble understanding how their costing system would change.
1.Show the basic differences between ABC costing systems and traditional overhead allocation systems. Based on your experience and knowledge, which method you prefer and why?
2.How might your company benefit from using ABC? Explain any experience you have with ABC?
3.Are there any circumstances for which you could not recommend that your company switch to an ABC costing system?
4.In your opinion, show why is overhead allocation required in most manufacturing environments?
5.What problems are caused by the allocation of overhead? In your judgment, which of the problems related with the allocation of overhead are overcome if ABC costing is used and do any problems remain?