When should management consider incurring the considerable cost of designing and implementing an activity-based costing system. Some indicators can signal the need for new costing system:
- Line managers do not believe the product costs reported by accounting department.
- Marketing personnel are unwilling to use product costs in making pricing decisions.
- Complex products that are difficult to manufacture are reported to be very profitable, although they are not priced at a premium.
- Product line profit margins are difficult to explain.
- Sales are increasing but profits are decreasing.
- Line managers suggest that apparently profitable products be dropped.
- Marketing or production managers are using bootleg costing system which are informal systems they designed, often on a personal computer.
- Some products that have reported high profit margins are not sold by competitors.
- The firm seems to have captured a highly profitable product niche all for itself without any significant expense on research and development.
- Overhead rates are very high, and increasing over time.
- Product lines are diverse.
- Direct labor is a small percentage of overall cost.
- The results of bids are difficult to explain.
- Competitor’s high-volume products seem to be priced unrealistically low.
- The accounting department spends significant amounts of time on special costing projects to support bids or pricing decisions.
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