Question

Apple must assign overhead costs to its products. Activity-based costing is generally considered more accurate than other methods of assigning overhead. If this is so, why don’t all manufacturing companies use it?

Short answer

Setting up and keeping up an ABC framework takes time and money, therefore do not used by all manufacturing companies.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Overhead cost

Overhead is the cost incurred for smooth working of business operation. These cost are not directly related to the production cost of goods.

On the monthly revenue statement, overhead studies the expenditures required to keep the healthy functioning of operation.

Explaining why all manufacturing companies don’t use activity-based costing.

Due to the following drawbacks, all manufacturing companies don’t use activity-based costing:

1. Data collection and planning take a long time.
2. It's more costly to assemble and assess information since source information isn't continuously promptly accessible from standard accounting reports.
3. ABC's reports do not adhere to consistent and largely accepted accounting standards and cannot be used for external reporting.
4. The information provided by ABC may conflict with governance performance norms established using traditional costing techniques.
5. It may not be as viable for businesses with low overhead as a rate of by and large working costs.