Acc 202 Moduel 4

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Elaine Ust ACC 202 Module 4 Case Allocating fixed costs Activity based management and activity based costing is different from a more traditional costing method because it uses multiple cost drivers and multiple overhead pools to allocate or apply overhead to products and cost objects. The main characteristics of ABC and ABM is that the charge the division or products for use of overhead resources consumed by charging for activities that are thought to drive costs. The goal is to create awareness that activities drain resources and have the products that use the resources have the costs mapped to their product or division. In this way the divisions and products that use the most resources are charged for those resources. Traditional allocations with one resources to spread overhead often charges products an "average rate" and so fussy and difficult products get a break (charged less than they consume or "under costed") and easy low-hassle products look worse than they are (charged more then they consumer or "over costed"). Companies that benefit from ABC are those that have significant levels of variable overhead and those with products that use disproportionate share of overhead resources. Companies with small overhead or products that all use overhead in about the same proportion would get about the same overhead allocation under traditional and ABC methods. Since ABC methods are more work (so more expensive), if there isn't a benefit, it is better to stick to a simpler and cheaper method. Krishnan (2006) implemented ABC at a university (actual university was kept anonymous in the study) to help them understand their costs and cost drivers in order to better understand why their operation costs were so high. This was not a typical manufacturing setting. The university was a service business and the overhead was separated into 12 cost pools and allocated
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