The accuracy of cost system information for reported product costs is essential for managers who use it to make decisions regarding pricing and whether or not a particular product line should be continued or dropped. The emergence of activity-based costing (ABC) has emerged to help in decisions where the number of products is large and thus decisions are not independent. Proponents of ABC argue that traditional product-costing systems are obsolete and should be replaced. The author of this article contends that there is no right or wrong system to use, and that the system should be chosen according to circumstance.
In the case of stock valuation for manufacturing companies, a simplistic product-costing system may be appropriate. However, for product pricing decisions, managers may choose long-run product costs. Overall the argument leans toward sophisticated systems since the possibility of undercosting would lead to the acceptance of unprofitable business. In addition, companies with high overhead should opt for sophisticated systems so as to avoid distorted product costs.
Where product introduction/abandonment decisions are infrequent (small number of products in line), a cost-accumulation system that assigns only direct costs to products is most useful. In this case it is more likely to treat product decisions as being independent.
The cost system design is an important component of the management accounting system within an organization. Through a broader examination of the content and use of cost systems to support management decisions via questionnaire, this publication will hope to determine whether the need to establish stock values influences cost system design in manufacturing organizations. It will then also be possible to gain insight as to what cost information companies use to assess profitability of their product lines.
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