Short Discussion Answers Only
Simpson Brothers Manufacturing Company has been using a traditional overhead allocation method to allocate costs to products since the company began. Although operations have been running fairly smoothly, the owners have been wondering if they should 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 understand in what way the method differs from the method they already use. The method they use allocates overhead based on labor hours used for each product. Since labor is certainly an “activity,” they are having trouble understanding how their costing system would change.
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