Developing a Grey Activity Based Costing (G-Abc) Method to Capture the Inherent Uncertainty in Identifying Cost Drivers' Consumption Rates

ABSTRACTActivity Based Costing (ABC) has been adopted as an efficient cost estimation instrument during the past decades, and several practitioners have verified its efficacy over traditional costing approaches by implementing it in various areas. However, it is occasionally discussed that implementing ABC is not cheap, simple and straightforward and many firms have abandoned the attempt due to rising costs and complexity. The increasing operation costs of implementing ABC systems then, to a great extend originate from the insistence on obtaining accurate data related to cost drivers consumption rates. Not only these data are not easy to obtain, but also they cannot be completely relevant and authentic in all production circumstances, and they carry uncertainty in their nature. To capture this uncertainty grey system theory has been developed and grey data could be assigned. This study introduces a Grey Activity Based Costing (G-ABC) method to develop a more realistic, cheaper, and easier to implement ABC system.KEY WORDS: Activity based costing (ABC), Grey system theory (GST), Uncertainty(ProQuest: . denotes formulae omitted.)INTRODUCTIONProduct cost estimation has always been side by side to product development, and influences many business activities and decisions. Costing is a challenging task, and imperfect methods will lead to loss of customers on one end, and loss of expensive resources cheaply on the other. Traditional cost systems then, used to distort cost information by using traditional overhead allocation methods (Qian & Ben-Arieh, 2008), where the overheads used to be distributed to the products by a single volume cost driver and there was generally only one stage for allocation of the overheads to the cost objects (Baykasoglu & Kaplanoglu, 2008). Those costing systems were only devised to collect indirect costs from departments, and then allocate them to products or services (Tsai & Kuo, 2004). The introduction of Activity Based Costing (ABC) in the late 80s and early 90s with the studies of Cooper (1988a; 1988b), Cooper and Kaplan (1991), and Johnson and Kaplan (1987), not only brought about more accurate allocation of overhead costs, but also provided valuable information about the area of waste (Gunasekaran & Sarhadi, 1998). It is an advanced cost calculation technique that allocates resource cost to products based on resource consumption (Demeere et al, 2009). ABC basically assumes that products require activities, activities consume resources, and resources cost money.ABC has been applied and implemented in several industries and businesses of different size. Demeere et al. (2009) implemented a time-driven ABC system in an outpatient clinic environment. Baykasoglu and Kaplanoglu (2008) applied ABC to a land transportation company. Liu and Pan (2007) developed an ABC system jointly with a large Chinese manufacturing company and examined some key success factors pertinent to ABC implementation within China as a developing country. Tsai and Lai (2007) utilized a mathematical programming approach to develop an ABC joint products decision model which incorporates capacity expansions and outsourcing features.The implementation of ABC in Small and Medium Enterprises (SMEs) has also been variously justified (Gunasekaran et al., 1999; Baxendale, 2001). However, ABC has received little attention from SMEs in spite of the fact that it has an important role to play in improving their competitiveness (Gunasekaran et al., 1999). This is to a great extend due to the fact that the development and management of ABC is a relatively time and resource consuming activity (Lievens & Kesteloot, 2003; King et al., 1994). High time and cost is required to estimate an ABC model and to maintain it (Kaplan & Anderson, 2004) and many managers have abandoned the attempt in the face of rising costs and employee irritation (Everaert et al., 2008). Another shortcoming of ABC is that, it implicitly uses severe proportionality assumptions (Noreen & Soderstrom, 1994; Christensen & Demski, 1995), which will be violated in real practice and at best ABC can be considered as an approximate method for decision-making (Balakrishnan & Sivaramakrishnan, 1996; Salafatinos, 1996; Balachandran et al. …