“I don’t understand the purpose of the cost hierarchy,” complained Erika Vijh, a seasoned plant manager at a Fortune 500 firm. Erika argues that, ultimately, the units produced in her factory must cover all of the costs in the plant. Otherwise, the head office will shutter the plant. In other words, she argues that it makes sense to somehow charge each unit of the product with its “fair” share of all costs, wherever the cost appears in the cost hierarchy.

Required:
How would you respond to Erika’s criticism? Your answer should include how the items in the cost hierarchy relate to the concepts of controllability and traceability, and how the relations help managers make effective decisions.