This case is designed to help students gain a more thorough understanding of activity‐based costing (ABC) than is usually obtained in introductory managerial accounting courses. If you have taken such a course, you have probably seen, in general, simple examples of activity‐based costing. However, ABC can be more complex than these examples indicate for three reasons: (1) the mechanics of ABC are far more complex than these simple examples indicate; (2) many of the design choices required in an ABC system, which are critical to the cost‐benefit decision, are omitted from the simple examples; and (3) without adequate detail, it is hard to see how economic consequences arise from the choice of costing systems.
The Pecos Products ABC Design Project (the “project”) addresses these issues by providing a hypothetical company with a detailed business scenario and asking you to help with the cost‐system‐design decision. To accomplish this, you will have to think about traditional cost system and ABC design issues, delve deeply into the cost system mechanics, and evaluate the benefits (economic consequences) of an ABC system in light of the cost and effort required to create it.