Because it is impossible to allocate all overhead expenditures to certain activities, ABC has this constraint and the fact that ABC systems do not allocate all manufacturing costs to products is one of the main reasons why ABC is not in compliance with GAAP.
What is activity based costing?
- In contrast to conventional costing techniques, this accounting method of costing acknowledges the connection between costs, overhead activities, and manufactured goods, allocating indirect costs to products less randomly.
- Allocating overhead and indirect costs to goods and services, such as salaries and utilities, is done using the productivity-based costing technique.
- The Activity Based Costing system of cost accounting is built around activities, which are defined as any occasion, project, or task with a clear objective.
- A cost driver is an activity, like purchase orders or machine settings.
- The amount of overhead and indirect costs associated with a specific activity is determined using the cost driver rate, which is the cost pool total divided by cost driver.
- ABC is used to better understand expenses, enabling businesses to develop a more suitable pricing plan.
Hence, Because it is impossible to allocate all overhead expenditures to certain activities, ABC has this constraint and the fact that ABC systems do not allocate all manufacturing costs to products is one of the main reasons why ABC is not in compliance with GAAP.
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