Variable Activity‐Based Costing and Decision Making

• DOI: http://doi.org/10.1002/jcaf.22277
• Published date: 01 July 2017
• Date: 01 July 2017

45

© 2017 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22277

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Variable Activity-Based Costing

and Decision Making

Matthew Geiszler, Kelsey Baker, and Jeffrey Lippitt

INTRODUCTION

This article

illustrates several

modifications to

activity-based cost-

ing (ABC) and shows

how these approaches

will improve the rel-

evance of the result-

ing product costs to

both long-term and

short-term decision

making. ABC was

developed to improve

the allocation of

indirect production

costs to products and

to aid in the manage-

ment of these costs.

Many managers felt

that a single cost

pool allocation of

overhead resulted

in product costs

that do not reflect

the combination of

resources that go into

the production of each prod-

uct (Cardinaels, Roodhooft,

& Warlop, 2004). The result-

ing “peanut butter” costing

overcosted some products and

undercosted others (Horngren,

Datar, & Rajan, 2012). ABC

refines the overhead allocation

process by allocating overhead

costs to several cost pools,

based on the activities involved

in the production process. The

costs of an activity

are then allocated

only to those prod-

ucts that utilize

that activity. Many

would argue that the

resulting product

costs are superior

to traditional cost-

ing because the

resulting product

costs do reflect the

resources that went

into the production

of the product more

accurately than tra-

ditional cost systems

(Balakrishnan &

Sivaramakrishnan,

1996; Homburg, 2005;

Schneeweiss, 1998).

In some ways, the

ABC approach may

present some dan-

gers that were not as

pronounced under

traditional costing

systems. Managers

are well aware that traditional

cost systems that mix together

fixed and variable components

of overhead costs, are inappro-

priate for use in decision mak-

ing. Because full absorption

Much of managerial decision making regarding

product pricing and output depends on a careful

separation of the fixed and variable components of

costs. Without this separation, the decision maker

will be unable to assess the impact of their deci-

sions on profitability. This distinction is particularly

relevant in allocating overhead. Both traditional

and activity-based costing (ABC) systems are full

absorption systems in the sense that they include

both fixed and variable production costs in product

cost. This mixing of fixed and variable overhead

costs results in product costs that are difficult to

use in decision making. This article uses a numeric

example to compare several alternate approaches

to overhead allocation. It highlights variable activ-

ity-based costing (VABC), which utilizes regression

analysis to estimate the fixed and variable portions

of each cost pool. The results show that VABC can

produce information that is more useful in deci-

sion making and that the resulting cost allocations

are superior to traditional costing approaches for

decision-making purposes. © 2017 Wiley Periodicals, Inc.

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