For enabling the management accountant to take a stand on the various assumptions in the process of decision making, the cost of the product or service is a key element. Traditionally there are various methods of ascertaining the cost of a particular product or service. One such method is collecting the various cost elements and allocating them to the particular product or service which is known as unit costing.
As outlined above one of the traditional ways of ascertaining the cost is to apportion a standard cost for each unit based on historical cost data. This system of ascertaining costs and base the managerial decisions have lost significance due to the fact that modern companies tend to have lower truly variable costs as against a very high degree of fixed costs. Also, the pieces of equipment that are being used have become more complex and specialized and they form a very significant proportion of total costs. In addition organization with a wide range of products has processes which are common to several finished items making cost allocation irrelevant or meaningless.
An alternative to the traditional costing systems, modern-day multi-process business corporations adapt the activity-based costing system which has proved a real tool in the hands of the managers for making proper business decisions. The activity-based costing system is a refinement of the costing system in which focus is centered on the individual activities as the fundamental cost objectives. Activity in an organization may take the form of an event, task or unit of work with a specified purpose. To illustrate. the design activity, set up an activity, manufacturing operations, shipping activity, distribution activity, and administrative activity can form the basic key costing elements for the refinement of the costing system and thereby to arrive.