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Answer A:
The traditional cost system, developed to value inventory, distorts product cost information because the cost system
 Was designed to value inventory in the aggregate and not relate to product cost information.
 Uses a common departmental or factory-wide measure of activity, such as direct labor hours or dollars (now a small portion of overall production costs) to distribute manufacturing overhead to products.
 Deemphasizes long-term product analysis (when fixed costs become variable costs).
 Causes managers, who are aware of distortions in the traditional system, to make intuitive, imprecise adjustments to the traditional cost information without understanding the complete impact.
Answer B:
1. The benefits that management can expect from activity-based costing include the following.
 Leads to a more competitive position by evaluating cost drivers, e.g., costs associated with the complexity of the transaction rather that the production volume.
 Streamlines production processes by reducing non-value adding activities, e.g., reduced set-up times, optimal plant layout, and improved quality.
 Provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decisions.
2. The steps that a company, using a traditional cost system, would take to implement activity-based costing include the following.
 Evaluation of the existing system to assess how well the system supports the objective of an activity-based cost system.
 Identification of the activities for which cost information is needed with differentiation between value adding and non-value adding activities.