Competition Bikes, Inc.

Should the company change to activity-based costing?

Before deciding whether the company should change to activity-based costing (ABC), it is critical to understand what ABC is. ABC is a "special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing models" (The Economist, 2009). The real benefit to ABC costing for Competition Bikes, Inc., is that it would permit the company to see what part of the overhead expenses were being used for the Titanium Xl and the CarbonLite modes. Each Titanium XL uses $136 in direct labor and $240 in manufacturing overhead. Each CarbonLite uses $294 in direct labor and $420 in manufacturing overhead. However, the models have significantly different selling prices. Therefore,...
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