Activity Based Costing Meaning

Allocate all $230k based on direct labor hours. Chairs (80% of hours) get $184k; Cabinets get $46k.

The primary benefit of activity-based costing is precision. When managers understand the true cost of their products, they can make better decisions regarding pricing. If ABC reveals that a high-volume product is actually losing money because it requires intense technical support, the company can raise the price or streamline the support process. It also helps in identifying "wasteful" activities that do not add value to the customer, allowing for more effective process improvements. activity based costing meaning

Product A is overcosted (looks less profitable than it is). Product B is undercosted (looks more profitable than it is). Bad decisions follow. Allocate all $230k based on direct labor hours