Philip Beaulieu

Coverage of Criticism of Activity‐Based Costing in Canadian Textbooks*

Textbook authors and publishers face a difficult decision regarding coverage of activity-based costing (ABC). ABC could be presented in a strictly positive light, because it enjoyed immense popularity when it was introduced in the 1980s and it is still referred to in favourable terms in practitioner journals. On the other hand, ABC can be criticized on practical and theoretical grounds. Surveys report that a minority of firms adopt ABC, and there are indications of dissatisfaction among some users. In addition, ABC requires direct proportionality and the exclusion of common costs, which are difficult conditions to meet. In this paper, we first describe the practical and theoretical material supporting criticism of ABC that is available to be cited by textbook authors. We then review the coverage of this material in the five textbooks that are most widely used in Canadian universities and colleges.

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

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 ABCs 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.

A Contracting Theory for Predicting and Managing Cost Behavior

The traditional concept of variable and fixed cost behavior is not accepted by all authorities in cost and management accounting (e.g., Anderson, Banker, and Janakiraman 2003; Kaplan and Witkowski 2014). This paper proposes a nexus of cost contracts theory in which costs are fixed and variable with respect to individual contracts for inputs, and contracts expire at different times within a single planning period. Resulting total cost functions may or may not appear to have variable and fixed costs, or to be symmetric. The theory provides interesting insights regarding the relationship between budgeting and outsourcing, the importance of negotiating skill to managing costs, the role of predicting contract parameter usage, risks and opportunities related to cost contract expirations, cost information system requirements, cost allocation, and asymmetric cost behavior.