To: Matt Brady, Paper Hats Product Manager
From: Priscilla Chuong, Cost Accounting
Date: March 21, 2016
Subject: Allocating Product Cost for Paper Hats

It has come to my attention that there is a matter regarding the new introduction of Paper Chains and its effect on your department. From analyzing the current cost allocation system we are using right now, it is clear that there is an unfair distribution of product costs from this new project that is discouraging the company’s cost of Paper Hats to competitors and customers. By examining three different cost systems however, Paper Products Factory will be able to distribute costs more efficiently between departments and will be able to sell each paper product at a reasonable selling price against competitors.

Unit Costing
The current cost system Paper Product Factory is costing by Units, and while the cost of the Paper Chains are at an efficient selling price $1.61 per unit, the cost of Paper Hats are skyrocketing, increasing from its initial price by more than fifteen percent. This is mainly due in part to the fact that the units needed to start up production for Paper Chains and the old units for producing Paper Hats are both included in the cost system. Every large transition like this costs a lot of money to start up for a company, but the numbers of this transition are reflected negatively through the increase in cost of other products to accommodate for the growth. Not only does this create fewer sales in Paper Hats, but also has an unfair analysis of the impact of Paper Chains in the market.

Activity Based Costing
A better way to distribute costs more evenly to each department would be through Activity Based Costing (ABC). Perhaps the most accurate way to assign costs to each department, the Activity Based Costing System allocates costs differently than Unit Costing. Each department must