The limitations of traditional overhead absorption, cost pools and cost drivers, calculating cost-driver rates, and comparing ABC with absorption costing.
Why activity-based costing?
Traditional absorption costing spreads overheads using a single base (often labour hours), which can badly distort product costs when overheads are driven by other factors. Activity-based costing (ABC) traces overheads to the activities that cause them, giving more accurate product costs — useful for pricing and product-mix decisions.
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