Importance of Manufacturing Overhead Allocation:
The percentages of product costs comprised by direct materials, direct labor, and manufacturing overhead for three companies are as follows:
Company A Company B Company C
Direct materials . . . . . . . . . . . . . . . . . . . 7% 21% 42%
Direct labor . . . . . . . . . . . . . . . . . . . . . .13% 42% 49%
Manufacturing overhead . . . . . . . . . . . . 80% 37% 9%
100% 100% 100%
Based on this information, which of these three companies would probably improve its product costing accuracy most by converting to activity-based costing (ABC)? Explain your answer.