Activity-based costing (ABC) emphasizes that activities consume companies' resources and drive costs (rather than volume alone driving costs). As a result, the companies benefiting the most from ABC would be companies with a significant amount of overhead pertaining to a diversity of activities in providing goods (or services) to customers whose demands also vary. In other words, if your company has little overhead cost and manufactures almost identical products requiring similar attention for each product, the need for ABC probably isn't there.

The overhead that we are referring to is not limited to manufacturing overhead. Some customers also demand activities that drive up the administrative overhead and the selling expenses. The idea behind ABC is that the customers and products that are causing the manufacturing and administrative overheads to occur should be assigned those costs. If there is the diversity of products and customers (some require costly activities and some don't), it isn't fair to simply spread all of the cost of all of the activities to all of the products and customers on the basis of just one activity, such as machining hours. The non-machining overhead costs should not be assigned to products and customers that don't require the other activities. The products and customers that demand the other activities should be assigned the cost of the other activities.

Again, if your company has little variation among products and customers, and most of its overheads are related to just one activity, such as machining hours, using machine hours to allocate the overhead costs is probably satisfactory. However, if you manufacture products that are not uniform in the attention and activities necessary to serve the customer, you should learn more about activity-based costing.

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