At a recent professional meeting, two controllers discussed product-costing problems in their respective companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system.Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her company, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. Lately, however, there has been a significant increase in the number of item colors.Both controllers are worried about the potential distortion of product costs under their traditional

Question

product-costing systems.Required: Which controller should be more concerned about the potential distortion? Explain.

What will be an ideal response?

Answer 1

Controller D should be more concerned. The variety of product lines made in his company's facility reflects diversity at the product-line and cost levels. In Controller M's firm, there still is only one product line, with an increasing number of models differentiated only by color. (In many applications, there is no or very little cost difference among color choices.) Thus, D's firm may be the victim of cost distortion and a prime candidate for activity-based costing.