Making decisions

- Now we need to make some decisions,…and to do that, we need to calculate the overhead cost…associated with each flavor of ice cream.…Let's illustrate this procedure by doing the calculations…for Gingerbread Cheesecake Supreme, as shown here.…You can see that a little arithmetic…allows up to compute the overhead cost…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 cost…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.…