# How Traditional Costing Methods Hinder the Development of Modular Product Architectures
## 4 Categorization of Abstraction Levels
### Introducing the Levels of Abstraction
On the other hand, it will attain cost  
Figure 1: Illustration of the three abstraction levels with a bicycle example. benefits due to modularity effects [15; 18], resulting in a lower batch cost. This can be ascribed to the improvement of the learning curve gradient due to larger lot sizes [68; 69], reduced inventory holding costs [59; 70; 71], reduced setup changes [72], and improved purchasing conditions [50; 68]. The increase in quantity due to just having one subsystem will lower the batch cost. The second option will introduce three variants of the frame (S1-S3), resulting in lower development (4000 for individual subsystems) and direct costs for each product variant. However, the process and complexity costs of introducing another variant will increase indirect costs, which, as previously described, cannot be accurately allocated to any of the three abstraction levels through existing cost allocation practices. A calculated example of the profitability of the two different solutions can be seen below in Table 2.  
The total revenue is calculated based on the revenue gained from the number of units sold times the sales price of each product (P1-P3). The direct costs (DCs) are based on the units sold times the material and labor costs. The indirect costs (ICs) are derived from multiplying the batch cost for each product by the number of units sold, adding the development cost as a one-time sum. The gross profit is determined by subtracting the total DCs from the revenue, and the profit with ICs is determined by additionally subtracting the total ICs from the gross profit, taking the indirect costs incurred into account. The example shows that the overall profitability of the products with a unique-to-one solution is higher when only direct costs following traditional accounting practices are considered. However, correctly allocating the indirect costs and calculating the overall profitability will showcase a better profitability for the modular solution. This has also been documented through empirical case studies. [PERSON] and [PERSON] have developed an estimation framework based on ABC to map activity costs to individual parts in the product family to assess how activity costs are affected by product family design decisions [14]. [PERSON] and [PERSON] conducted a case study illustrating the issues of project accounting \begin{table}
\begin{tabular}{l c c c c c c c c} \hline \hline  & \multicolumn{3}{c}{**Unique-to-One Solution**} & \multicolumn{6}{c}{**Modular Solution**} \\ \hline
**Revenue** & **P1** & **P2** & **P3** & **Sum** & **P1** & **P2** & **P3** & **Sum** \\ \hline \# of Units Sold & 100 & 80 & 50 & & 100 & 80 & 50 & \\ Sales Price & 150 & 200 & 250 & & 150 & 200 & 250 & \\ \hline Total Revenue & 15,000 & 16,000 & 12,500 & 43,500 & 15,000 & 16,000 & 12,500 & 43,500 \\
**Direct Costs (DCs)** & & & & & & & & & \\ \hline Material & 30 & 35 & 40 & & 40 & 40 & 40 & \\ Labor & 20 & 20 & 25 & & 25 & 25 & 25 & \\ \hline Total DCs & 5000 & 4400 & 3250 & 12,650 & 6400 & 5200 & 3250 & 14,950 \\
**Indirect Costs (ICs)** & & & & & & & & \\ \hline Development Cost & 4000 & 4000 & 4000 & 12,000 & 3500 & 3500 & 10,500 \\ Batch Cost & 50 & 50 & 50 & & 40 & 40 & 40 & \\ \hline Total ICs & 9000 & 8000 & 6500 & 23,500 & 7500 & 6700 & 5500 & 19,700 \\
**Result** & & & & & & & & \\ \hline Gross Profit & 10,000 & 11,600 & 9250 & 30,850 & 8500 & 10,800 & 9250 & 28,550 \\ Profit w. IC & 1000 & 3600 & 2750 & 7.350 & 1000 & 4100 & 3750 & 8850 \\ \hline \hline \end{tabular}
\end{table} 
Table 2: An example of a profitability calculation comparing unique-to-one solutions with modular solutions. The development costs for the modular solution are just a total sum, which has been distributed evenly across the products since they share the same subsystem. The result provides a comparison between the calculated gross profit of the unique-to-one product solutions versus the modular solution. First, the gross profit is determined without considering indirect costs (ICs), and afterwards, the profit with ICs.