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Summit Systems, Inc: Variable vs Absorption costingThe controller of Summit Systems Inc. devised a new costing
system based on tracing the cost of activities to products. The controller was
able to measure post-manufacturing activities, such as selling, promotional,
and distribution activities, and allocate these activities to products in order
to have a more complete view of the company’s product costs.This effort produced better strategic information about the
relative profitability of product lines. In addition, the controller used the
same product cost information for inventory valuation on the financial
statements.Surprisingly, the controller discovered that the company’s
reported net income was larger under this scheme than under the traditional
costing approach.
Why was the net income larger, and how would you react to
the controller’s action?