Identifying overhead cost activities

- The first step in implementing an ABC overhead system is to identify overhead cost activities. So you need to do a detailed study of the production process to determine exactly what activities cause overhead costs. With a traditional overhead cost system we basically view overhead as a big lump cost generated by the production process as a whole. We then assume there is a simple relationship between this big lump of cost and a single measure of activity that is based on output volume, such as number of direct labor hours or machine hours or gallons of ice cream produced. To do a better job of assigning overhead we need a better understanding of the key activities involved in the production process that create overhead costs. Lily herself, the owner of Lily Ice Cream Company, has done this analysis and has created the following list of key activities. One, operating the ice cream production process. Two, producing a specific batch of ice cream. Three, servicing the special needs of…