An analytic hierarchy approach to activity-based costing

Abstract

This article presents an estimating model for determining how overhead costs might be allocated to different products. The model, which is loosely based on Activity-Based Costing (ABC), incorporates Saaty's Analytical Hierarchy Process (AHP) in estimating the overhead costs associated with each product. The proposed model uses overhead cost categories, and other cost-correlated information, as well as managers' subjective judgements for detail classification of overhead costs when “hard” data are not available. This model allows business to determine the benefits of ABC before actual implementation. A real-world example illustrates the model.