Document Type

Article

Publication Date

2014

Published In

Journal of Business Case Studies

Keywords

Activity-based costing, Product costing, Absorption costing, Cost allocation, Cost assignment

Abstract

This case enables cost accounting students to understand two important and related topics: design flaws inherent in traditional absorption costing systems and the fundamentals of activity-based costing (ABC). The focused approach requires only one class session to cover both topics. Ripken Products, a fictional manufacturer, uses absorption costing to cost its products. The company allocates manufacturing overhead using a budgeted manufacturing overhead rate based on direct labor cost. The company president decides to discontinue a product with a reported zero gross profit. A student intern suggests that the company could improve the accuracy of its costing for individual products if it assigned manufacturing overhead using activity-based costing. Students learn to calculate product costs using ABC, and then they explore reasons for significant differences between ABC costs and the companys reported costs. Students discover the logical flaws of allocating overhead costs arbitrarily using traditional absorption costing methods. They also learn why assigning overhead costs based on traceable consumption of resources leads to more accurate product costing.

DOI

10.19030/jbcs.v10i2.8502

Creative Commons License

Creative Commons Attribution 3.0 License
This work is licensed under a Creative Commons Attribution 3.0 License.

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