8-9 In traditional cost systems, product-level
analysis contains no indication of what costs can
actually be adjusted nor is there any indication of
costs are indiscriminately spread across all prod-
ucts using direct labor-hours or some other allo-
who would be responsible for adjusting the costs
after a decision has been made. It would be dan-
cation base that is tied to volume. As a conse-
gerous, for example, to drop a product based
quence, high-volume products are assigned the
solely on the activity analysis. Most of the costs
bulk of such costs. If a product is responsible for
do not automatically disappear if a product is
40% of the direct labor in a factory, it will be as-
signed 40% of the manufacturing overhead cost
dropped; managers must take explicit actions to
in the factory—including 40% of the product-level
eliminate resources or to transfer resources to
other uses. Managers may be reluctant to take
costs of low-volume products. In an activity-
based costing system, batch-level and product-
these actions—particularly if it involves firing or
transferring people. The action analysis has the
level costs are assigned more appropriately. This
advantage of making it clearer where savings
results in shifting product-level costs back to the
products that cause them and away from the
have to come from and hence which managers
will have to take action.
high-volume products. (A similar effect will be
observed with batch-level costs if high-volume
products are produced in larger batches than low-
volume products.)
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