Weighted average consumption of cost drivers

Abstract

Purpose An Activity-Based Costing (ABC) system generates a significant amount of detailed, complex data for management to evaluate and use, potentially reducing decision-making effectiveness. The purpose of this paper is to show how reducing the magnitude of detailed information that an ABC system provides can increase decision-making effectiveness. Design/methodology/approach This study develops a theoretical Weighted Average ABC model by taking ABC information and rearranging it to enhance decision-making effectiveness. Findings Weighted Average ABC provides cost assignments that are approximately the same to those of ABC in most situations. In Weighted Average ABC, the weighted average consumption ratios provide relevant decision-making information to determine which products are costlier. To reduce costs, management can focus on those costlier products or services and can request from the cost accountants additional detailed information concerning those costlier products or services. Research limitations/implications This study adds to the ABC literature by developing Weighted Average ABC. However, the limitation of this study is that no actual data could be obtained from a company that uses ABC, and thus, this study develops an analytical model. Practical implications Weighted Average ABC may increase decision-making effectiveness in situations when managers need to make fast decisions. Originality/value This study develops a theoretical Weighted Average ABC model in which the weighted average activity consumption ratios of the product lines and the total overhead costs are the variables needed, thus skipping Stage 1 of ABC. This, in turn, reduces the amount of information provided to management. Accordingly, weighted Average ABC provides timelier and more manageable information for decision making.