ACC 560 Case 2 Answers Managerial Accounting Week 3 Activity-Based Costing

1. Answer: Two reasons why an activity-based costing (ABC) system may be appropriate for Wall Décor would be as follows. (1.) ABC system leads to more accurate product costing. By breaking costs down into more refined categories, product costing will be even more accurate. That is, ABC system can lead to more cost pools being used to assign overhead costs to products, and then costs can be assigned more directly on the basis of the cost drivers used to produce each product. However, in this case of Wall Décor, traditional overhead allocation, which is based on the cost of print and volume of expected units sold to assign overhead costs, often results in that the unframed prints are being allocated too much overhead costs and framed prints too little overhead costs. (2.) ABC system leads to enhanced control over overhead costs. The reason is that using the ABC system, companies can trace many overhead costs directly to activities – allowing some indirect costs to be identified as direct costs. In the Wall Décor, the information technology (IT) department has the highest overhead costs including two out of the four activities occurring, which are website optimization and framing and matting. ABC system can reflect that a large portion of overhead costs is associated with the framing and matting component of the production area. This allows manager to better track the activities that lead to costs. 2. Answer: