Question

An activity based costing system that is designed for internal decision making will not conform to generally accepted accounting principle because

Answer 1

This costing system allocates overhead costs (also known as indirect costs) to the required activity (suppose the job no. 23) and then finds total cost of that activity. This system is useful for managerial decision making; therefore, the purpose is internal.

It doesn’t follow GAAP because of the following reasons:

1) Few manufacturing cost are not considered here, like sustaining cost, idle cost, etc.

2) Few non-manufacturing costs are considered here, like supervision salary.

3) Few allocations are subjective, because they are not in GAAP guidelines.