PARADIGM A: THE ERA OF THE INDUSTRIAL REVOLUTION.
PARADIGM B: THE ERA OF COST-VOLUME-PROFIT ANALYSIS AND DIRECT COSTING. 3.
PARADIGM C: THE ERA OF ACTIVITY- BASED COSTING. 4.
PARADIGM D: THE ERA OF MARKET DRIVEN STANDARD COSTS AS OPPOSED TO ENGINEERING-DRIVEN STANDARD COSTS. 5.
THE CHANGE IN THE RELATIONSHIP BETWEEN COSTS AND SELLING PRICE HIGHLIGHTED THROUGHOUT THE 20TH CENTURY 6.
COMMENTS ON FERRARA"S THOUGHTS ON THE 21ST CENTURY PARADIGM 8.
The paradigms outlined by Ferrara.
Paradigm A: The era of the Industrial Revolution.
The most important or the base of this paradigm was standard cost or the total cost per unit of output. When arriving the total cost per unit of output, almost all the costs including direct materials, direct labor, manufacturing overhead, and even marketing and administrative costs were accounted. As the final step of the process, to achieve the targeted or desired profit a target-selling price per unit was arrived. This was done by adding the desired profit or markup, to the total cost per unit. The bottom line of paradigm A was to achieve the projected costs per unit, to achieve the price (target selling price per unit) that would yield desired profitability.
Paradigm A - Calculating and Using Unit Product Costs Ignoring the Distinction Between Fixed and Variable Costs.
Manufacturing costs .
Direct materials $200,000.
Direct labor 250,000.
Manufacturing overhead 450,000.
Marketing and administrative costs 500,000.
What volume of activity should be used to determine unit costs?.
How should desired profit be determined?.
Paradigm B: The era of cost-volume-profit analysis and direct costing.
This introduces the distinction between fixed and variable costs, which ultimately leads to cost-volume-profit analysis and direct costing. The volume of activity issue relates mainly to fixed costs, because the variable costs per unit are determined by engineering standards and analysis techniques and many variable costs have become more fixed over time.