31. (Traditional vs. ABC methods) Many companies now recognize that their cost systems are inadequate in the context of today’s powerful global competition.

Managers in companies selling multiple products are making important product decisions based on distorted cost information, because most cost systems designed in the past focused on inventory measurement. To elevate the level of management information, current literature suggests that companies should have as many as three cost systems for (1) inventory measurement, (2) operational control, and (3) activity-based costing.

a. Discuss why the traditional cost information system, originally developed for valuing inventory, distorts product cost information.

b. Identify the purpose and characteristics of each of the following cost systems:

1. Inventory measurement 2. Activity-based costing

c. Describe the benefits that management can obtain from using activity-based costing.

d. List the steps that a company using a traditional cost system would take to implement activity-based costing.