Essay: Activity Based Costing-Boeing 747

Sample Essay

In the production of Boeing 737, the company can apply ABC so that it can be certain of the exact profitability of the product. This can be done by first identifying the cost drivers, which are the factors that lead to the incurrence of a cost. Since it is not an easy task to allocate indirect costs to the products or services being produced, it is advisable that they are allocated by the use of the cost drivers. With the increase of the production of Boeing 737, there are fixed costs that are going to be incurred.

Increased production means that there are increased machine hours and these calls for increased maintenance costs, which are indirect costs but caused by increased production of Boeing 737. Further, because of increased production of Boeing 737, raw materials are expected to increase and thus increased handling costs of the raw materials. The increased handling costs incurred are also indirect costs brought about by the increased raw materials purchases to cater for the increased orders. Also due to the increased orders, there will be need for increased inspection hours and this will be viewed as indirect costs driven by increased orders, increased production hours and increased machine runs.

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