Sample Essay
The author of the article states that the use of cost accounting systems that highlight variable and fixed costs can be misleading for the management as fixed costs and variable costs both contribute towards the expense or the costs that are to be realized and born by the business. Using the variable and fixed cost based management approach the businesses can sell off some of their products and services at minimal prices which can result in the realization of the total costs behind the products/service.
Moreover when customers come to know of this price disparity, they would want to pay the minimal price only. The chances of bearing a loss on such sales are therefore very high while the use of variable and fixed cost concepts can lead to unrealistic business decisions regarding pricing. In such circumstances the activity based costing system can be more appropriate as it eliminates the use of fixed and variable costing system and instead focuses on the assigning the costs according to the various objects identified based on their consumption of the process and the activity behind the cost. This helps in better rationalization of the cost based on how much cost is directly associated with each object in the business.
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