The Purposes Of Full Absorption Product Costs

1942 Words8 Pages
I. Introduction
The aim of this essay is to explain the purposes of full absorption product costs which are categorized into traditional method and Activity-Based-Costing (ABC) system; to examine the benefit of ABC system that outweigh traditional method; to analyse the survey finding that only about 15 per cent of companies surveyed use ABC system; and to justify why ABC system has been found to be more useful in financial and service organisations. The essay is divided into five main parts. First, the purposes of calculating full absorption product costs will be explained. Second, a comparison between traditional method and ABC system will be drawn to find out that the ABC system is considered more useful than the traditional method.
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Traditional method tends to use arbitrary allocations that are not significant determinants of the costs. On the contrary, ABC mainly uses cause-and-effect allocations as significant determinants of the costs and refrains from arbitrary allocations. Therefore, cause-and-effect allocations should be used to get accurate assignment of indirect costs to cost objects. Figure 1 below describes the different types of product costing systems.

Figure 1: Types of Product Costing System Management accounting textbooks (Kaplan and Atkinson, 1989; Drury, 1992) explained that there are two purposes of product costs: first, for financial accounting by calculating the manufacturing costs incurred during a period between costs of goods sold and inventories; second, for managerial decision-making requirements by providing useful information.
For decision-making purposes, product cost information is one of the most important inputs for pricing decisions or product-mix decisions. Organisations that sell highly customized or differentiated products or services, or who lead the market, have some choice in setting their selling prices. The pricing decisions can be influenced by the cost of the product. Other organisations have their selling prices set up by the market as they only have little or no power over the selling prices of their products. However, cost information is still considerably important for
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