Many firms realise that there are fundamental problems with the methods they use to cost their products or services. But should they change from traditional product costing methods to activity-based costing (ABC) methods? It is important first of all to understand the limitations of existing product costing systems in today’s competitive environment typified by a diverse product line populated by many low-volume complex products.

1. What are the disadvantages of traditional product costing systems that they no longer meet the needs of today’s managers?

2. How does the cost structure of most manufacturing firms today differ from their cost structure of 20 years ago?

3. What caused this change in cost structure?

4. Why can’t traditional product costing systems account for costs of product diversity? Volume diversity? Product complexity?