Step-ABC: A Means of Coping with the Full Cost Allocation Dilemma

32 Pages Posted: 21 Feb 2007

See all articles by Philip Beaulieu

Philip Beaulieu

University of Calgary

Shujun Ding

York University - Atkinson School of Administrative Studies

Date Written: February 16, 2007


Full cost data are irrational for planning and pricing decisions from a microeconomic perspective, but surveys consistently indicate that managers prefer to use full cost data to make pricing decisions. This paper presents a model, called step-ABC, that supplies full cost data but makes users more aware of the limitations of full cost allocations. By referring to ABC's cost hierarchy, the step-ABC method categorizes cost items according to their traceability and proportionality. Unit and batch level costs are direct costs that vary proportionally with changes in cost drivers, sustaining costs are direct but do not vary in a proportional basis with changes in cost drivers, and facility level costs are neither direct nor proportional. The full cost data presented to managers by the step-ABC method incorporate these three components, notifying managers when sustaining and facility costs may depart significantly from marginal costs. By reporting full cost in this format, the step-ABC model, compared to the conventional ABC model, can provide information relevant for both long- and short-term decisions, and offers insight for both planning and control purposes.

More importantly, step-ABC acknowledges the step nature of most sustaining and facility costs and incorporates facility planning into the model. Therefore, the step-ABC method is not limited to historical cost information, but supplies managers with the boundary conditions that affect cost allocation. The step nature of costs increases capacity flexibility and may mitigate losses resulting from use of full cost allocations. Practical implications are discussed.

Keywords: common costs, fixed costs, marginal cost, cost-plus pricing

JEL Classification: M40, M46, D40

Suggested Citation

Beaulieu, Philip and Ding, Shujun, Step-ABC: A Means of Coping with the Full Cost Allocation Dilemma (February 16, 2007). Available at SSRN: or

Philip Beaulieu (Contact Author)

University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
403-220-7304 (Phone)
403-282-0095 (Fax)

Shujun Ding

York University - Atkinson School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3

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