Conventional costing systems use a two-stage allocation process:     1. service department costs are     allocated     to production departments.     2. production department overhead costs     are allocated to products using a     volume-based predetermined     overhead rate. Problem: There may be no relationship between the overhead application base and the way that different products cause overhead costs The result: High-volume simple products are over- costed and over-priced Low-volume complex products are under-costed and under-priced Companies have tended to use direct labour as the overhead application base. However direct labour is now a relatively minor part of total manufacturing cost.  Many tasks that used to be done by hand are now done by automated equipment. There is a no link between the cause of support activity costs and the basis for assigning these costs to products Why?     1.  Allocations are based on unit or volume    related measures.     2.  Different products consume different      amounts of support activities.   Price cuts produce increased sales in units but decreased total revenue High mark-ups on specialty products didn’t offset the fall in profit margins of high volume products Increased product diversity changing cost structures use of volume-based cost drivers Have resulted in:     distorted product costs