The result of implementing the Activity-Based Costing (ABC) system had demonstrated that the cost per box of each product lines differed from the cost per box calculated under both the Volume-Based Costing and the Direct Materials plus Direct Labor (DM + DL) Costing systems.
Since the ABC system assigned cost drivers for each activity cost pool, the overhead cost allocated to each product lines under the ABC systems must be substantially more accurate than the overhead cost allocated under the Volume-Based Costing and DM + DL Based Costing. Accuracy in this context refers to the congruency of each product lines and the part of the overhead cost from a particular cost pool it should be accounted for.
By doing the procedure described above for each activity cost pool, the overhead cost allocated to each product lines under the ABC system would be more accurate comparing to the Volume-Based/ DM + DL Based Costing systems. This is because Volume-Based/DM + DL lump all the activity cost pool together, in practice, summing all the overhead costs in to one number. Then, the total overhead cost is allocated to each product lines using the number of units produced (under the Volume-Based Costing system) and direct materials plus direct labor used (under the DM+DL Costing system). The portion of the total overhead cost allocated to each product lines is proportionate by the portion of units produced for each product lines (under the Volume-Based Costing system) and the portion of DM+DL used for each product lines (under the DM+DL Costing system).
The overhead costs allocated for each product lines under the Volume-Based Costing system and the DM+DL Costing system wouldn’t reflect the real overhead costs incurred by each product lines. Fortunately, this problem’s solved with the invention of the ABC system. ABC system could allocate overhead costs to each product lines more accurately because of the use of multiple cost pools. Furthermore, assigning a more accurate...