Activity based costing

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• I found the section on activity-based costing very interesting, specifically as related to the allocation of overhead. Normal job order costing determines a single allocation basis to allocate the estimated overhead for the period. As per the text, direct labor is typically the popular basis for allocation. However, this is not always an accurate way to allocate costs. What if you are producing several uniqure products, one of which utilizes more machinery and less direct labor. In this scenario, that product would be allocated less overhead based on the job order costing methodology. In that same scenario, the product utilizing more machinery would also likely be using more electricity. Under job-order costing, most of the electrical overhead would be allocated to the other products, assuming the basis being used was direct labor. This is not a accurate way to allocate this cost. What activity-based costing does is it allows for businesses to pick the allocation basis that suits each individual component of cost the best. This provides managers with more accurate cost information, allowing them to make better business decisions.