Despite the enthusiasm for the ABC system, managers continued to have intense internal discussions about how to use the ABC data to manage the company’s highly fixed plant and distribution cost structure. A number of expenses, such as depreciation and equipment leases, were already committed, and Kemps’ labor agreement provided for minimum-hour guarantees for its workforce. Therefore, reductions in service levels or plant complexity created only an opportunity for cost savings. Additional actions would have to be taken to capture these to produce actual cost savings. For example, Kemps discovered that a long-haul distribution route was losing money on a fully allocated basis. But management could not agree to eliminate the route because of the impact from the volume loss on plant overhead absorption. Also, eliminating the route would end a long-term customer relationship. Thus, managers were learning that while its time-driven ABC system was giving the company more accurate information about business profitability, it could not be used by itself for business decisions.

How would you advise Kemps on the internal issues (described above) that were being debated about use of the ABC system?

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Activitybased costing ABC is a method of assigning overhead and indirect costssuch as salaries and u... View the full answer