From the course: Accounting Foundations: Managerial Accounting

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Doing the math to influence your decisions

Doing the math to influence your decisions

From the course: Accounting Foundations: Managerial Accounting

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Doing the math to influence your decisions

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- Now we need to make some decisions, and to do that, we need to calculate the overhead costs associated with each flavor of ice cream. You can see that a little arithmetic allows us to compute the overhead costs assigned to Gingerbread Cheesecake Supreme. We can do a similar computation for each of the ice cream flavors as shown. These data reveal a key insight that can arise from an ABC analysis. The amount of overhead cost associated with production is not necessarily proportional to the level of some simple measure of activity, such as direct labor hours, or in this case, the number of gallons of ice cream produced. For example, more gallons of Vanilla, 500,000, are produced than any other flavor, and yet the amount of manufacturing overhead costs created by the production of Vanilla is just $285,500. That's substantially less than the $374,300 in overhead associated with Gingerbread Cheesecake Supreme. The high…

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