Reference no: EM13843542

1. There are three reasons that Activity Based costing is not an acceptable practice for external accounting reports. First, non manufacturing costs are only allocated to the products that cause them. Shipping, commissions and warranty costs for a computer would not be allocated to a refrigerator for example. Secondly, some manufacturing costs are treated as period costs and not product costs. Organization-sustaining costs and both indirect and direct costs not caused by the product itself are excluded from the product cost. Organization-sustaining costs include security guards, salary for the plant controller, and office supplies not used in the manufacturing process. Unsed or idle capacity as well as any overhead can be excluded as well. again if not directly caused by the product in question. The third reason is that the ever more complex cost pools and allocation bases of today's manufacturing world can skew the true unit product cost if reported externally. For example with allocations, if unit level activities are used, the cost will be more realistic, if batch level activities are used, then the activity is account for each time used, regardless of how many units are produced during that session.

2. Activity based costing, as described in the chapter, is unacceptable for external financial reports. Product costs calculated with activity based costing exclude some manufacturing costs, while also including some non-manufacturing costs. This is not an accurate portrayal of sales for external financial reports. There are two stages of allocation in activity based costing. Costs are to be allocated into activity cost pools and from there are allocated to products, customers, and other cost objects. The first stage of allocation is based on interviews, rather than verifiable data. Overall, activity based costing may be undesirable because it manipulates measures such as products costs used in making financial decisions. Using activity based costing may also affect how individuals are viewed as directly related to this system. Therefore, activity based costing is typically considered an unacceptable system for external financial reports, as described in the chapter by including and excluding certain non-manufacturing and manufacturing costs.