461. Given that most companies at the time were producing a very limited variety of products that required similar resources to produce, allocation bases such as direct labor hours, or even machine-hours, worked fine because, in fact, there was probably little difference in the overhead costs attributable to different products.462. Companies began creating new products and services at an ever-accelerating rate that differed in volume, batch size, and complexity.463. In this new environment, continuing to rely exclusively on a limited number of overhead cost pools and traditional allocation bases posed the risk that reported unit product costs would be distorted and, therefore, misleading when used for decision-making purposes.464. Activity-based costing, thanks to advances in technology that make more complex cost systems feasible, provides an alternative to the traditional plantwide and departmental approaches to defining cost pools and selecting allocation bases.465. In general, duration drivers are more accurate measures of resource consumption than transaction drivers, but they take more effort to record.466. Costs at the batch level depend on the number of batches processed rather than on the number of units produced, the number of units sold, or other measures of volume.467. Organization-sustaining activities includes activities such as heating the factory, cleaning executive offices, providing a computer network, arranging for loans, preparing annual reports to shareholders, and so on.468. These cross-functional employees possess intimate knowledge of many parts of an organization’s operations that is necessary for designing an effective ABC system.469. Well then, how about if all of you commit the time and energy to help me build a fairly simple activity-based costing system that may shed some light on the problems we are facing?470. Like most other ABC implementations, the ABC team decided that its new ABC system would supplement, rather than replace, the existing cost accounting system, which would continue to be used to prepare financial statements for external parties.471. Remember that organization sustaining costs are assigned to the Other cost pool and are not allocated to products.472. This is because the Other cost pool consists of organization-sustaining costs and unused capacity costs that are not allocated to products and customers.473. After discussing the pros and cons, the team concluded that it would not be worth the effort at the present time to keep track of actual design time spent on each new product.474. These reports help companies channel theirresources to their most profitable growth opportunities while at the same time highlighting products and customers that drain profits.475. A similar report could be prepared for each of Classic Brass’s 250 customers, thereby enabling the company to cultivate relationships with its most profitable customers, while taking steps to reduce the negative impact of unprofitable customers.476. Indeed, the traditional cost system is sending misleading signals to Classic Brass’s managers about each product’s profitability.477. The traditional cost system overcosts the standard stanchions and consequently reports an artificially low product margin for this product.478. The ABC system does not assign the manufacturing overhead costs consumed by the Customer Relations activity to products because these costs are caused by customers, not specific products.479. The result is that traditional cost systems overcost high-volume products and undercost low-volume products because they assign batch-level and product-level costs using volume related allocation bases.480. The third reason the product margins differ between the two cost systems is that the ABC system assigns the nonmanufacturing overhead costs caused by products to those products on a cause-and-effect basis.
