Activity-based costing (ABC)

Marconi is a Portuguese telecommunications company that encountered problems with its ABC system. The companys production managers felt that 23% of the costs included in the system were common costs that should not be allocated to products and that allocating these costs to products was not only inaccurate, but also irrelevant to their operational cost reduction efforts.

Concerns over the application of the ABC approach at Marconi have been raised by personnel, including some of the senior leadership team. It is the opinion of some that this method of cost allocation does not accurately reflect the cost of production and will lead to unnecessary improvements that will ultimately result in the elimination of jobs. As a respected member of the leadership team, the Chief Executive Officer (CEO) has tasked you with investigating the concerns expressed by some of the employee and management officials. You are expected to prepare a position paper either defending the use of the ABC method or recommending an alternative method of cost allocation.

1 defending the use of the ABC method or recommending an alternative method of cost allocation.