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Colorscope Case Study

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3. Firs of all, full absorption cost analysis can guide pricing decisions. To be survive and profitable in the long run, the prices charged must exceed total costs. As indirect costs, such as rent cost, are also necessary supporting cost to complete the job, indirect cost should not be ignored. If Colorscope uses the direct cost analyses to make its pricing decisions, the product will be under cost, resulting in under pricing. The underpriced product, although the manager has originally thought that it could bring about increasing, will in fact lead to less revenue than the cost of resources they use.
What’s more, by taking indirect costs into consideration and allocating overhead costs to the product, company can calculate a cost of each particular product depending upon the resources it consumes.
In addition, full cost analysis contributes to better management. Inaccurate product costs will mislead managers about the profitability of different products. Therefore, managers might unknowingly promote unprofitable products while deemphasizing profitable products.
Lastly, full absorption cost analysis helps to find unnecessary costs that should be eliminated, to manage the overhead costs that are usually fixed in the short run but are variable in the long run, and to improve product quality through better product and process design.
The full cost analysis is based on the assumption that overhead costs are variable with cost object. For example, the supervision, quality control, and rent costs that are considered overhead costs for costing each job, but they are direct costs for the PrePress department.
Besides, because the cost driver is used as the cost-allocation base in each job cost pool, another assumption is that there is a cause-and –effect relationship between cost drivers and overhead…...

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