Question

1. Why do companies use ABC as contrasted with a single-rate allocation system?
2. Why do companies use JIT?
3. What is a work cell? How does it differ from a traditional production system?
4. Do you agree or disagree with the solution to the Ethics issue mentioned on page 1045? Why or why not?

Answer 1

Activity based costing is an accounting methodology that assigns costs to activities rather than products and services. This enables resources and overhead costs to be more accurately assigned to products and services that consume them. ABC is a technique which involves identification of cost with each cost driving activity and making it as the basis for apportionment of costs over different cost objects/ jobs/ products/ customers or services.

The companies prefer ABC over single-rate allocation system because of below reasons.

1. High amount of overhead: When production overheads are high and significant cost, ABC will be very much useful instead of the single-rate allocation system
2. Wide range of products: ABC is most suitable, when, there is diversity in the product range or there are multiple products.
3. Presence of Non-volume related activities: When non-volume related activities (for example: material handling, inspection set-up), are present significantly and single-rate system cannot be applied, ABC is a superior and better option. ABC will identify the non-value adding activities in the production process that might be a suitable focus for attention or elimination
4. Stiff competition: When the company is facing stiff competition and there is an urgent requirement to compute cost accurately and to fix the selling price according to the market situation, ABC is very useful. It facilitate in reducing cost by identifying non-value added activities in the production process.