Question

The method used to apply overhead costs can be considered a business strategy rather than simply a way to allocate costs. In one to two paragraphs:

Discuss why many companies have moved to activity-based costing (ABC).
Explain how ABC can make a company run more efficiently.

Answer 1

Many companies have moved to activity-based costing (ABC) because it provides a more accurate way of allocating overhead costs compared to traditional methods. ABC can make a company run more efficiently by providing a better understanding of costs and enabling improved resource allocation.

Step-by-step explanation:

Many companies have moved to activity-based costing (ABC) because it provides a more accurate way of allocating overhead costs compared to traditional methods like direct labor hours or machine hours. ABC identifies the specific activities that drive costs in a company and assigns those costs to products or services based on their consumption of those activities.

ABC can make a company run more efficiently by providing a better understanding of the costs associated with each activity. This allows companies to identify and eliminate non-value-added activities, improve resource allocation, and make more informed decisions about pricing, product mix, and process improvement.