The cost systems at many companies selling multiple products have become less than adequate in today’s global competition. Managers often make important product decisions based on distorted cost information because the cost systems have been primarily designed to focus on inventory measurement. Current literature suggests that many manufacturing companies should have at least three cost systems, one each for inventory measurement, operational control, and activity based costing.
a. Identify the purpose and characteristics of each of the following cost systems:
1. Inventory measurement
2. Activity based costing
b. Discuss why a cost system developed for inventory valuation could distort product cost information.
c. Describe the benefits that management can obtain from using activity based costing.
d. List the steps that a company using a traditional cost system would take to implement activity based costing.
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