Modifying Duration-Based Costing to Illustrate the Effect of Fixed Costs

Abstract

This study introduces Modified Duration-Based Costing (MDBC) as an alternative to Duration-Based Costing (DBC) developed in Lelkes and Deis (2013). Both DBC and ABC have a tendency to treat fixed costs as though they were variable. This study expands on the DBC model by showing an alternative way of dealing with fixed costs instead of treating them as variable costs. This study uses analytical methodology and simulations to analyze MDBC relative to an Activity-Based Costing (ABC) system. The results of this study imply that the proportion of fixed costs will affect how close the MDBC cost assignments are to those of ABC. The lower the proportion of fixed costs, the closer the MDBC cost assignments are to those of ABC. MDBC has the potential to be a feasible alternative of ABC. MDBC is valuable if, for decision-making purposes, management wants to keep the effects of fixed costs separate from variable costs. Moreover, using MDBC is less costly and easier to implement, maintain, and update than ABC.