Purpose: Turney examines ten myths related to ABC product costing identified from the comments of managers and academics, myths meaning a commonly stated view that is accepted without critical analysis.

• ABC system identifies activities and cost drivers, traces costs to each activity, and then traces the cost of the activities to products by means of the cost drivers.
• The data needed for an ABC system already exists in the plant and can be easily captured
• ABC system reduces special studies that companies perform to supplement the information reported by the product costing system.

• The additional number and type of cost drivers make an ABC system difficult to understand
• ABC systems are easy to understand even though there are more cost drivers than unit-based systems because these drivers describe the major factors that create the demand for activity
• ABC systems reflect economic reality better therefore are easier to understand than cost accounting systems.

• There is a limit to the accuracy that can be achieved by simply increasing the number of cost centers.

• Advantages of using machine hours instead of direct labor hours:

• machine hours may provide more reasonable overhead rates
• When machine base diversity exists the number of machines that an operator runs varies according to the product produced

• Machine hours will not produce accurate product costs if much of a company’s costs is incurred by activities that are not at the unit level

• In plants where product homogeneity exists, there is no need for an ABC system
• Inaccurate product costs may occur where product diversity exists because more and different types of cost drivers are needed.
• ABC may need to be implemented for companies who have product diversity or they incur significant costs in activities that are not at the product level.

• Managers have a feel for what the costs are to produce their products
• Managers do not realize the size of the problem or product cost distortions

• Pricing to market is common in many industries, which means that the role of product costs in setting prices is, therefore, limited.
• Improved accuracy is an important benefit of ABC systems.
• Even firms that do not use product costs to set prices should still devote attention and resources to products based on relative profitability

• While the cost of fixed activities does not vary with the number of product units, it may vary with the number of batches and different products produced.
• Failure to recognize batch-level and product-level activities diminishes the perceived benefit of ABC systems.
• Conventional systems recognize only one level of variability, the unit-level.

• Excluded activities from this myth include R&D costs, selling and distribution
• GAAP influences the exclusion of non-manufacturing activities from product costs because they are classified as period costs rather than product costs.
• Failing to include non-manufacturing costs distorts product costs if the cost of activity is high and the activities are consumed differently by different products.

• Managing cost drivers using ABC may reduce product costs.

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