The controller of Accent Systems Inc. devised a new costing system based on tracing the cost of activities to products. The controller was able to measure post-manufacturing activities, such as selling, promotional, and distribution activities, and allocate these activities to products in order to have a more complete view of the company’s product costs. This effort produced better strategic information about the relative profitability of product lines. In addition, the controller used the same product cost information for inventory valuation on the financial statements. Surprisingly, the controller discovered that the company’s reported net income was larger under this scheme than under the traditional costing approach.
Why was the net income larger, and how would you react to the controller’s action?