Considering production time in allocating costs and estimating profits at a Fortune 500 manufacturing corporation: A case study

Abstract

Purpose

Prior research has used computer-generated data to illustrate the benefits of the recently developed duration-based costing (DBC) and its affiliate modified duration-based costing (MDBC). The purpose of this paper is to use data from a Fortune 500 corporation to compare its traditional, or functional-based, cost allocation method with that of the recently developed DBC and MDBC models.

Design/methodology/approach

A Fortune 500 company provided one month of production data for a particular, key machine within its manufacturing process. The data were used to apply DBC and MDBC.

Findings

Variations arising from differences in the models’ cost allocation reveal the advantages of using time-based cost allocation over the traditional, mostly non-time-based allocation to estimate profit.

Research limitations/implications

By using actual data, this case study enhances prior theoretical research concerning the benefits of utilizing DBC and MDBC over the traditional costing method.

Practical implications

This case study is of benefit to practitioners who use traditional costing since it will encourage them to explore DBC and/or MDBC that tend to be more accurate in situations where the old adage of “time is money” applies. Implementing DBC and MDBC was not difficult to do for the Fortune 500 company as all of the components to run the models were readily available.

Originality/value

This is the first study to utilize actual company data to illustrate DBC and MDBC, and thus, adding to the literature concerning DBC and MDBC.

Citation

Lelkes, A.-M.T. and Krueger, T.M. (2020), "Considering production time in allocating costs and estimating profits at a Fortune 500 manufacturing corporation: A case study", Managerial Finance, Vol. 46 No. 2, pp. 283-298. https://doi.org/10.1108/MF-01-2019-0020