This report is going to present the difficulties and implications that arise in the real world, when an entity tries to determine the costs for its products. For a manufacturing company, like Cadbury NZ, the fluctuation of foreign exchange rate and the price of imported raw materials increase the difficulty in determining the costs. For a service entity, like the radiology departments, the problems they met in settling the cost of their services were created by the advancing technology, but adopting ABC could solve them. The low quality of costing information provided to a wine manufacturer by using volume based costing, could be improved by utilizing ABC. Lastly, the trouble a knit factory faced was the cost distortion, which was fixed by ad hoc adjustment.
Determining a cost for a good or service an entity provide, is one of the essential works need to be done by the accounting department, and several different approaches are applied according to various needs. Traditional costing system used to be the dominant system. As product diversity gradually become the manufacturing priorities for many firms, the conventional costing system usually would have difficulty in allocating the overhead costs to the various products accurately, especially when various products consume different proportions of overheads. Activities Based Costing (ABC) method was developed, aiming to address the limitations of the conventional methods (Abernethy, Brownell, Carter, and Lillis, 2000). Nevertheless, the entities usually would still face various difficulties when they try to determine the costs of their products; no matter what system they choose. For the purpose of this essay, some difficulties the following entities came across in determining costs would be explored, as well as some of the methods they used to overcome them. In the following paragraphs, the difficulties Cadbury NZ encounters, how the radiology departments of two hospitals and a wine manufacturer using ABC to increase the accuracy of their costing information, and finally, how a traditional knit manufacturing company utilizing volume based costing system dealt with its difficulties, are going to be mentioned.
