Activity-Based Costing and Cost
Interdependencies among Products:
The Denim Finishing Company
Dennis Caplan, Nahum D. Melumad, and Amir Ziv
ABSTRACT: A fictional example illustrates how interdependencies among products in the production process, and the costs associated with those interdependencies, chal- lenge the ability of cost accounting systems to generate decision-useful product cost information. The cost interdependency in the current example is a production-line change- over cost that is incurred to retool a machine whenever the production process changes from one product to another. Both marginal costing and full cost activity-based costing (ABC) are employed in an attempt to provide decision-relevant product-level information in connection with the decision to add a new product.
Keywords: activity-based costing; cost interdependencies; product profitability analy- sis; change-over costs; setup costs.
The Morning Let-Down Diane Wiese, recently hired Marketing Director for The Denim Finishing Company, the first person ever to hold that title, was not good at hiding her emotions. Whenever she felt angry or embarrassed, her face turned red, and this morning, she was both. Two months ago, she had left a mid-level marketing position at a large international apparel manufacturer to accept a toplevel position at this small contractor laundry, which provides laundering and finishing operations to apparel manufacturers. She made the move because she liked the idea of being a big fish in a small pond. She was also influenced by the enthusiasm and force-of-personality of the president and principal shareholder, Tom Corcoran, who had started the company 15 years earlier. Diane knew that Tom expected a lot from her, and she had anticipated that her announcement this morning would be her first delivery on those expectations. She had proudly outlined in the morning management meeting the details of a possible exclusive contract to provide laundering...
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