Cost Management

Activity-based costing differs from traditional costing systems in a number of ways. In activity-based costing,
non-manufacturing as well as manufacturing costs may be assigned to products. And, some manufacturing costs may be
excluded from product costs.

-Discuss other differences between activity-based costing and the traditional costing systems.
-Discuss the reasons that activity-based costing may be resisted by top management.
-Discuss why activity rates are important to management.
-In your opinion, why activity-based costing approach is probably unacceptable for external financial reports.

The controller of Chicago Company is in charge of installing a new costing system that includes the allocation of
indirect manufacturing costs to the producing departments. After studying the situation, he found there were three
cost drivers that could be used to assign the indirect costs, each with its own merits. After computing the
allocations for the departments on a sample month, he found that each cost driver favored (that is, assigned less
costs to) a different department. Machine hours favored Department X, direct manufacturing labor hours favored
Department Y, and number of processing steps performed favored Department Z.

-What additional factors must the controller consider before deciding on an allocation base for the indirect
manufacturing cost assignment to the departments?
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