ArvinMeritor, Inc. discovered that incorrect factory overhead cost allocations had "overcosted" some of its products by roughly 20%. As a result, these products were over-priced and began losing market share. Would you recommend the usage of activity based costing (ABC) as a superior method of allocating factory overhead costs? Why or why not?

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ArvinMeritor, Inc. discovered that incorrect factory overhead cost allocations had "overcosted" some of its products by roughly 20%. As a result, these products were over-priced and began losing market share. Would you recommend the usage of activity based costing (ABC) as a superior method of allocating factory overhead costs? why or why not?

ABC costing is more suitable where a company produces different types of products with different activities. Where the company produces only one product then ABC or traditional method will provide the same result.

Check the current overhead allocation method. There may be some mistakes there in estimating overhead allocation rates.

If you need a tutorial on Activity Based Costing you need to refer to a proper text book.

http://www.principlesofaccounting.com/chapter 20.htm#ACTIVITY-BASED COSTING