Chapter 6
Activity-Based Costing: A Tool to Aid
Decision Making
Solutions to Questions
well as manufacturing costs may be assigned to
products. And, some manufacturing costs—
including the costs of idle capacity—may be
measure of activity. These measures of activity
often differ from the allocation bases used in
base for overhead, it is implicitly assumed that
overhead cost is directly proportional to direct
while overhead has been increasing. This
suggests that there is no longer a direct link
labor is accompanied by an increase in overhead.
This violates the assumption that overhead cost is
convenient measure.
managers also have the authority to link ABC data
to the employee evaluation and reward system.
implementation process.
6-4 Unit-level activities are performed for
activities must be carried out to support a product
regardless of how many batches are run or units
sustaining activities are carried out regardless of
the company’s precise product mix or mix of
not be assigned to products. These costs
represent resources that are not consumed by the
be allocated to activity cost pools and then they
are allocated from the activity cost pools to
to estimate how much time they spend in each
activity. The most practical approach is often to
they perform their tasks, but both of these
alternatives are costly and it is not obvious that
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244 Managerial Accounting for Managers, 3rd Edition
costs are indiscriminately spread across all
products using direct labor-hours or some other
for 40% of the direct labor in a factory, it will be
assigned 40% of the manufacturing overhead
level costs are assigned more appropriately. This
results in shifting product-level costs back to the
products are produced in larger batches than low-
cost of resources consumed to carry out a
particular activity such as processing purchase
identify which activities have unusually large
costs. If some other organization is able to carry
6-10 The activity-based costing approach
this chapter, exclude some manufacturing costs
