Activity-based costing differs from traditional costing systems in a number of ways. In activitybased 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
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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