Evaluating Cost Systems
Posted: 8 Jul 1998
Date Written: February 1996
Activity-based Costing requires the accurate assignment of direct and shared costs to goods and services. Much has been written on the importance of accurate assignment, and the benefits that flow from it. There is a void in testing whether assignment is done accurately--whether the costs reported by the ABC system reflect actual resources consumed. This paper proposes a statistical model that can be used to test the accuracy of the set of costs derived from an ABC system. The model can be used initially to determine whether the benefits of adopting ABC exceed the costs and can also be used to monitor the ability of an ABC system to deliver accurate product costs once it has been installed. The model is flexible and accommodates factors other than cost that influence productivity; for example defects, which incur costs without creating output.
JEL Classification: M41
Suggested Citation: Suggested Citation