Activity-Based Costing and Cost Interdependencies among Products: The Denim Finishing Company

Abstract

A fictional example illustrates how interdependencies among products in the production process, and the costs associated with those interdependencies, challenge the ability of cost accounting systems to generate decision-useful product cost information. The cost interdependency in the current example is a production-line change-over cost that is incurred to retool a machine whenever the production process changes from one product to another. Both marginal costing and full cost activity-based costing (ABC) are employed in an attempt to provide decision-relevant product-level information in connection with the decision to add a new product.