How might implementing activity-based costing change

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Problem

VMD's reliance on direct labor costs as the sole overhead allocation driver shows signs of obsolescence due to automation and declining relevance of labor in total costs. As fewer procedures rely heavily on direct labor, this outdated method distorts cost information, potentially overpricing some services and underpricing others. This misalignment can trigger a death spiral by pushing prices up on lower-margin services, causing demand to drop and overhead to be spread over fewer units. Comparing the three systems, Posh's proposed activity-based costing offers the most accurate reflection of resource usage and would likely support better pricing and strategic decisions. Get the instant assignment help. How might implementing activity-based costing change the way managers evaluate the profitability of specific services or equipment investments at VMD?

Reference no: EM133975298

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