Variable Activity‐Based Costing and Decision Making

Published date01 July 2017
Date01 July 2017
© 2017 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22277
Variable Activity-Based Costing
and Decision Making
Matthew Geiszler, Kelsey Baker, and Jeffrey Lippitt
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 &
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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