ABC Company has both a manufacturing division and a sales division. The manufacturing division makes one product on multiple production lines at one location. The sales division operates across the entire continental U.S. in five geographically-determined territories.
Right now, there is no formal budgetary control system in place. Upper management has asked you to research the budgeting process (including the potential use of activity-based costing), in order to advise them if it is a good idea to institute a budgetary control system for the entire organization. They have asked that you address the following questions:
- Are there any advantages/disadvantages to using activity-based costing vs. conventional cost-value-profit analysis?
- Are both methods equally applicable to manufacturing and sales activities, and if not, why?
- What factors should be considered when deciding what method(s) to use for control and evaluation?
Are there any elements that are essential to success in using a budgetary control system? If so, what are some of these elements?
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The activity based costing method is considered to provide better cost estimates than the traditional cost-value-profit analysis. The biggest advantage is that it identifies the various activities which are performed to produce a product and allocates the overhead costs to those activities on the basis of the cost drivers. While material costs are...
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