FORMALIZING PRODUCT COST DISTORTION: The Impact of Volume-Related Allocation Bases on Cost Information
The purpose o f this study is to formally analyze product cost distortions resulting from the process of allocating costs to products based on Activity-Based Costing (ABC) and the conventional product costing systems. The model developed in this paper rigorously shows the impact of treating costs th...
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| Format: | Article |
| Language: | English |
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Universitas Gadjah Mada
2003-09-01
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| Series: | Gadjah Mada International Journal of Business |
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| Online Access: | https://jurnal.ugm.ac.id/gamaijb/article/view/5630 |
| _version_ | 1819291812346462208 |
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| author | Johnny Jermias |
| author_facet | Johnny Jermias |
| author_sort | Johnny Jermias |
| collection | DOAJ |
| description | The purpose o f this study is to formally analyze product cost distortions resulting from the process of allocating costs to products based on Activity-Based Costing (ABC) and the conventional product costing systems. The model developed in this paper rigorously shows the impact of treating costs that are not volume related as if they are. The model demonstrates that the source of product cost distortion is the difference between the proportion of driver used by each product in ABC and the proportion of the base used by the same product in the conventional costing systems. The difference arises because the conventional costing systems ignore the existence of batch-related and product-related costs.
The model predicts a positive association between volume and size diversity with product cost distortions. When interaction between volume and size diversity exists, the distortion is either mitigated or exacerbated. The magnitude of the distortion is jointly determined by the size of the differences and the size of the total indirect costs. |
| first_indexed | 2024-12-24T03:44:35Z |
| format | Article |
| id | doaj.art-3bcf541b5ad54532874caf6a9682051d |
| institution | Directory Open Access Journal |
| issn | 1411-1128 2338-7238 |
| language | English |
| last_indexed | 2024-12-24T03:44:35Z |
| publishDate | 2003-09-01 |
| publisher | Universitas Gadjah Mada |
| record_format | Article |
| series | Gadjah Mada International Journal of Business |
| spelling | doaj.art-3bcf541b5ad54532874caf6a9682051d2022-12-21T17:16:46ZengUniversitas Gadjah MadaGadjah Mada International Journal of Business1411-11282338-72382003-09-015338140010.22146/gamaijb.56304956FORMALIZING PRODUCT COST DISTORTION: The Impact of Volume-Related Allocation Bases on Cost InformationJohnny Jermias0Faculty of Business Administration, Simon Fraser University, Burnaby, British ColumbiaThe purpose o f this study is to formally analyze product cost distortions resulting from the process of allocating costs to products based on Activity-Based Costing (ABC) and the conventional product costing systems. The model developed in this paper rigorously shows the impact of treating costs that are not volume related as if they are. The model demonstrates that the source of product cost distortion is the difference between the proportion of driver used by each product in ABC and the proportion of the base used by the same product in the conventional costing systems. The difference arises because the conventional costing systems ignore the existence of batch-related and product-related costs. The model predicts a positive association between volume and size diversity with product cost distortions. When interaction between volume and size diversity exists, the distortion is either mitigated or exacerbated. The magnitude of the distortion is jointly determined by the size of the differences and the size of the total indirect costs.https://jurnal.ugm.ac.id/gamaijb/article/view/5630activity-based costingindirect costsproduct cost distortionssize and volume diversity |
| spellingShingle | Johnny Jermias FORMALIZING PRODUCT COST DISTORTION: The Impact of Volume-Related Allocation Bases on Cost Information Gadjah Mada International Journal of Business activity-based costing indirect costs product cost distortions size and volume diversity |
| title | FORMALIZING PRODUCT COST DISTORTION: The Impact of Volume-Related Allocation Bases on Cost Information |
| title_full | FORMALIZING PRODUCT COST DISTORTION: The Impact of Volume-Related Allocation Bases on Cost Information |
| title_fullStr | FORMALIZING PRODUCT COST DISTORTION: The Impact of Volume-Related Allocation Bases on Cost Information |
| title_full_unstemmed | FORMALIZING PRODUCT COST DISTORTION: The Impact of Volume-Related Allocation Bases on Cost Information |
| title_short | FORMALIZING PRODUCT COST DISTORTION: The Impact of Volume-Related Allocation Bases on Cost Information |
| title_sort | formalizing product cost distortion the impact of volume related allocation bases on cost information |
| topic | activity-based costing indirect costs product cost distortions size and volume diversity |
| url | https://jurnal.ugm.ac.id/gamaijb/article/view/5630 |
| work_keys_str_mv | AT johnnyjermias formalizingproductcostdistortiontheimpactofvolumerelatedallocationbasesoncostinformation |