**Case Study: XYZ Manufacturing Company-Implementing Activity-BasedCosting (ABC)** **Background:** XYZ Manufacturing Company specializes in the production of customized industrial machinery. As the company expands its product line and faces increasing competition, the management team recognizes the need for a more accurate cost accounting sy stem to improve cost transparency and aid in strategic decision-making. **Current Costing System:** The company currently uses a traditional costing system based ondirectlabor hours to allocate overhead costs. However, this method has limitations, especially in a technologically advanced manufacturing environment where the correlation between direct labor and overhead costs is diminishing. **Decision to Implement ABC:** After careful consideration, the management decides to implement ActivityBasedCo sting (ABC) to gain a more accurate understanding of the cost structure. ABC allocates overhead costs based on the activities that consume resources, providing a more precise distribution of costs compared to the traditional approach. **Implementation Steps:** 1. **Identifying Activities: The first step involves identifying the key activities within the manufacturing process. This includes setup, machining, as sembly, and quality control. 2. **Assigning Costs to Activities:** Once activities are identified, the next step is to assign costs to eachactivity. This may involve adetailed analysis of resource consumption and the identification of cost drivers for each activity. 3. **Determining Cost Drivers: : Cost drivers, such as the number of setups, machine hours, or inspections, are crucial in allocating costs to products accurately. Assigning costs based on these drivers ensures that products are charged for the resources they actually consume. 4. **Implementing the System:** With the activity-based coststructure defined, the company implements the new ABC system across its manufacturing processes. This involves training employ ees on the new methodology and updating the accounting software to accommodate the changes. **Challenges and Strategies:** The implementation of ABC may pose challenges, such as res istance from employ ees accustomed to the traditional costing system and the need for additional time and res ources for the transition. To address these challenges, the company plans comprehensive training programs, communicates the benefits of ABC to employees, andestablishes a support sy stem to address concerns during the transition. **Expected Benefits: * By implementing ABC,XYZ Manufacturing Company anticipates gaining a clearer understanding of the true costs associated with each product. This information willenable more informed pricing decisions, identification of cost-saving oppor tunities, and improved res ource allocation. **Fillinthe Blanks Questions:** 1. The costing system at XYZ Manufacturing Company relies on direct labor hours, whichmay lead to inaccurate cost allocations in a technologically advanced manufacturing environment. 2. In Activity-Based Costing (ABC), costs are allocated based on the activities that consume resources, providing a more accurate distribution of costs compared to the traditional approach of using as the sole allocation base