A Note on Optimal Cost Driver Selection in ABC
Posted: 28 May 2001
In implementing an ABC-system, the selection of cost drivers is a major issue since accuracy must be traded off against the complexity of the ABC-system. On one hand, a high accuracy in allocating overhead costs often requires a high number of cost drivers. On the other hand, a small number of cost drivers is desirable to achieve acceptable information-cost and to make the ABC-system easier for management to understand. In this paper a mathematical model to support optimal cost driver selection is developed. While existing approaches consider only the possible replacement of one cost driver by just one other cost driver, the model takes into account that cost drivers can also be replaced by combinations of cost drivers. This approach yields a more accurate cost allocation with the same ABC-system complexity.
Keywords: Activity-based costing; Cost driver accuracy; Cost driver selection; Cost driver combinations
JEL Classification: M40, M46
Suggested Citation: Suggested Citation