Why and what is the incentive to overproduce in activity based costing. What are some ways to mitigate the incentive for managers to overproduce?
Thank you
Solution
Activity based costing :- In activity based costing respective costs are allocated to respective ddepartments on the basis of the cost drivers used in the department . For example ispection cost being allocated on the number of inspections , Supervisory cost allocated on the basis of number of supervisions. The incentive to overproduce in activity based costing is the allocation of fixed overhead more the units are produced less the fixed overhead is allocated to each product resulting in the increase profitability of the company the only thing is that company should be capable of selling all the products that it produce or stockcompile the finished goods
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Why and what is the incentive to overproduce in activity based costing.docx
1. Why and what is the incentive to overproduce in activity based costing. What are some ways to
mitigate the incentive for managers to overproduce?
Thank you
Solution
Activity based costing :- In activity based costing respective costs are allocated to respective
ddepartments on the basis of the cost drivers used in the department . For example ispection cost
being allocated on the number of inspections , Supervisory cost allocated on the basis of number
of supervisions. The incentive to overproduce in activity based costing is the allocation of fixed
overhead more the units are produced less the fixed overhead is allocated to each product
resulting in the increase profitability of the company the only thing is that company should be
capable of selling all the products that it produce or stockcompile the finished goods
