Activity‐Based Costing and Cost Interdependencies among Products: The Denim Finishing Company

A fictional example illustrates how interdependencies among products in the production process, and the costs associated with those interdependencies, challenge the ability of cost accounting systems to generate decision‐useful product cost information. The cost interdependency in the current example is a production‐line change‐over cost that is incurred to retool a machine whenever the production process changes from one product to another. Both marginal costing and full cost activity‐based costing (ABC) are employed in an attempt to provide decision‐relevant product‐level information in connection with the decision to add a new product.