Buzz Ltd is a toy manufacturer. For many years Buzz Ltd produced and sold just one toy, a plastic car, but it has recently started to produce and sell a range of different toys including trains, buses, trucks and caravans. Buzz Ltd is concerned that its current traditional system of allocating overheads is leading to inaccurate product costs. Describe Activity Based Costing and explain why it may be useful for a company such as Buzz Ltd.

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Overheads

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyze overhead expense as it helps the company in determining how much a company must charge for its products and services so that they can generate profit.  Overhead expenses depend upon the nature of the business operations.