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Title: Towards a conceptual foundation of activity-based costing : theory and a simulation experiment
Author: Pereira, Samuel Cruz Alves
Awarding Body: University of Edinburgh
Current Institution: University of Edinburgh
Date of Award: 2004
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This study extends existing literature on the theoretical foundations of activity-based costing (ABC). This is done in two principal ways. Firstly, it identifies the conditions that support the construction of an aggregate activity output, i.e. the conditions under which a single measure of output can be used to accurately determine cost object incremental costs. This is a significant issue which has not been explored in the management accounting literature. However, as this study demonstrates, it does impose important conditions on the technological specifications of situations where ABC can generate decision relevant costs. Two conditions are jointly necessary and sufficient. The first one is the linear homogeneity property associated with each cost object production function. This condition ensures that marginal costs are constant, which is essential if the cost reported by an ABC system is also to be a relevant cost for decision-making. The second is that the marginal cost corresponding to a unit of cost driver used by a cost object is equal for all cost objects within a cost pool. This condition guarantees that the aggregated cost function at a given activity level depends on only one cost driver. Secondly, this study derives the short run structure of ABC. Based on the finding that ABC, as a basis for decision relevant costs, is only compatible with both linearly homogeneous technologies and activities operating with excess capacity, an analytical representation of the short run equation of capacity is presented. This is one of the highest profile innovations of ABC systems (Cooper and Kaplan, 1992). This study then develops existing product costing theory by investigating the consequences of relaxing the two above situations. Firstly, it considers situations where technologies are not linearly homogeneous. Two types of technologies are explored: homogeneous and non-homothetic technologies. The reason for choosing these two technologies is that they accommodate a great number of non-linear input-output relationships. Overall, the distortions arising from the application of average cost driver rates to cost outputs, a fundamental procedure underlying both conventional and ABC systems, increase as the elasticity of each input demand deviates from one, that is to say, when we depart from a linearly homogeneous technology. Secondly, and on the assumption that cost object technologies are linearly homogeneous, this study develops a simulation experiment with the objective of both testing the existence of a single cost driver and evaluating an accounting procedure that specifically accommodates the existence of multiple cost drivers. The simulation experiment serves also to introduce the question of uncertainty in input usage, another issue that has been neglected in the product costing literature.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available