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t hand and to keep with the competition, the company has taken up the decision to focus more on the new costing and pricing techniques to keep their focus on the customer and on maximization of the profit through cost reduction.
The company uses the traditional costing methods to base the cost of their surgical equipments which are quite outdated and are therefore show a lesser profit as compared to the new costing methods which can help a company to maximize their profits.
The traditional method used by the company does not focus on the reason for the occurrence of the cost i.e. whether the cost is directly linked with the production of the equipment or the cost is merely an overhead cost. (Exact Cost n.d.) Therefore, the cost is incorrectly charged to the product which decreases the profit margin for the company.
It does not differentiate the cost on the basis of their use. As a certain material used in the production of equipment may be more costly than the other but is required in a limited quantity while the other may be cheaper but required in huge quantity.
Costs cannot be properly allocated on the basis as to which department has provided the maximum amount of service to the particular department and the large amount of cost may be allocated to a department which has provided no service at all thus increasing the cost of that particular equipment.
In contrast with the traditional costing methods which have certain deficiencies, a modern costing method can be used. This method is known as Activity Based Costing (ABC). Some points regarding this method are discussed in detail below:
This method is based on the actual costing of a particular department as people who are connected to the department are involved in the costing process extract the data of cost to be allocated and allocate the cost to the production or service department as per the level of service provided.
Since the costs are properly allocated to the respective departments in the
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