Question

A company's management accountant is trying to improve the way costs are allocated within the company. Currently, several corporate expenses are grouped together and labeled overhead. If the accountant wanted to use activity-based costing (ABC) to help solve the problem, what should she do?

a. She should try to map the departments' costs to their cost objects, and then charge each department based on those cost relationships.
b. She should research how the company's competitors are allocating their costs, and then implement one of those strategies.
c. She should look for bottlenecks within the production process, and try to eliminate them, thus reducing costs.
d. She should examine the firm's value chain and apply target costing before adopting ABC.

Answer 1

The management accountant should use activity-based costing by mapping company activities to their corresponding costs and allocating overhead based on usage, allowing for more accurate product costing. (option a)

Step-by-step explanation:

If a company's management accountant wants to use activity-based costing (ABC) to improve the way costs are allocated within the company, she should first map the company's activities and associated costs to their cost objects. This means identifying various activities within the company that consume resources and assigning their costs to the products or services that benefit from these activities.

To apply ABC, the accountant needs to:

• Determine the cost structure for the firm, including the total fixed costs and variable costs.
• Identify the activities that are the cost drivers and determine the cost pool for each activity.
• Allocate overhead costs to products or services based on their usage of these activities.

By doing so, the company can allocate costs based on actual consumption rather than a blanket overhead rate, potentially leading to more accurate product costing and improved decision-making.