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Prior work has focused on the impact of using alternative bases for allocating costs to products but there has been little work that evaluates the use of alternative allocation bases for allocating costs to departments. In particular, if different departments of a multi‐national firm are located in settings with different reporting requirements, exchange rate risks, and costs of capital, then the choice of cost allocation base can be important. This paper examines the economic impact of alternative service department allocation bases in a decentralised setting. A non‐linear programming (NLP) approach is used to model the problem. A review of prior literature identifies a method, based on the NLP approach, for determining the economic impact of alternative allocation bases in a multi‐product setting. The method is adapted in this paper for the multi‐divisional context. The study finds that centralised production volume decision‐making is superior to decentralised decision‐making using either revenue or volume‐based cost allocation bases. Under certain conditions, revenue‐based allocation bases are also found to be superior to volume bases. Under the assumptions of the model no distinction can be made between the centralised solution and a profit‐based allocation regime. A practical implication of this study is that designers of cost allocation systems need to consider not only the direct income‐shifting effect of different cost allocation bases but also the indirect economic effect of consequential changes in the operating decisions of the firm.

Preface The functions of business divide into several areas and the general focus of this book is on one of the most important although least understood of these—DISTRIBUTION. The particular focus is on reviewing current practice in distribution costing and on attempting to push the frontiers back a little by suggesting some new approaches to overcome previously defined shortcomings.

This chapter takes a critical perspective on the conventional wisdom that more advanced cost allocation methods have the potential to provide a more accurate picture of “true” cost, inevitably leading to optimal product mix and pricing decisions, and ultimately to greater profitability.

Two concrete examples of the growing divergence between cost accounting theory and practice – the failures of activity-based costing and the reciprocal method of service department cost allocation to take root in practice – are examined through the lens of post-structuralist literary theory.

The findings suggest that economic truth has been devoured in an accounting simulation. The accounting model no longer reflects any profound economic reality; it precedes reality.

Much of the mainstream management accounting literature remains theoretically grounded in the belief that ‘true’ cost exists, as an object, which is revealed through our cost accounting systems. This chapter raises serious questions about this foundation, and therefore the practical applicability of a great deal of research.

Society has granted the accounting profession a great deal of responsibility and autonomy, largely on the confidence that it has historically provided an objective and truthful model of economic reality. The findings in this chapter suggest that the basis for the accounting profession’s preferential charter in society ought to be critically examined.

At a time where research has advanced toward an ever-narrower focus on self-referential tautologies and ever more complex modeling techniques, this chapter provides a new and stimulating, albeit provocative, perspective to yet unresolved issues in management accounting research and practice.

Regardless of the approach taken to allocating common costs, is cost allocation really necessary? Argues that such an exercise may not make any difference to the final outcome ‐ the company’s final profit or loss figure. Takes as an example the University of Clemson, USA’s system of costing and reporting, and describes the university’s Finance Committee’s challenge to that system.

A proposal for a distribution cost and revenue analysis format to provide information for logistics decisions and control.

The purpose of this paper is to present the use of activity-based costing (ABC) approach as an alternative option to the traditional cost accounting system. The contribution of this study is to demonstrate, through a simple example, the application of that costing system in a service (maintenance) industry, i.e. the paper intended to develop a procedure for a cost model that help in calculating any maintenance job cost, to a reasonable degree of accuracy, based on the actual activities performed.

This research uses a simple example whereby hypothetical activities and cost data of maintaining an injector and a pump, of an internal combustion engine, are used, presented and analyzed based on the use of the developed procedure.

ABC system provides more accurate cost estimates rather than the traditional “order costing” methods that uses unit-level costs which are variable in relation to change in service volume. Traditional cost methods distort the costs by applying overhead uniformly over different jobs of varied complexities and activities scope. On the other hand, ABC is a useful means to distribute the overhead costs in proportion (fairly) to the actual activities performed in a specific job and, hence, enhance the rationality of decision making, i.e. will not distort the accounting information used for cost reduction, pricing, and evaluation matters. The results obtained from the analysis showed that allocating costs to the maintained injector decreased from $83.55 to $71.95 and, finally, to $67.57 when using the workshop-wide, two-stage and ABC overhead allocation methods, respectively; while that of the pump increased from $298.90 to $340.34 and, finally, to $359.48 when using the same three methods, in the same order, respectively. The result is quite fair when considering the complexity of the fuel pump, in terms of design and maintenance, when compared with the injector. Notice that using volume to allocate overhead costs results in over costing high-volume products, e.g. injectors (simple in terms of design and operation) and under costing low-volume products, e.g. pumps (more complex in terms of design and operation). The paper recommends to use ABC as a more accurate and fair method when charging maintenance job orders based on the analysis of costing two maintained items in the same premise while consuming different overhead resources.

This study attempts to analyze different methods to calculate a specific corrective maintenance job order. It strives to remedy the drawbacks of the traditional overhead costing of a job order when using principles related to the size of service, such as the direct labor cost/hours, as an allocation base. Consequently, the study proposed a new costing method, i.e. application of ABC. The traditional costing approach is considered by many firms as the best costing method. Nevertheless, it allocates overhead cost over job performed uniformly (equally) not differentiating between the complexity of the job and variety of the activities performed, e.g. using the same allocation base for “oil change” and “fuel pump adjustment” activities. So, ABC prevents cost distortions (unfairness) that could not be prevented by traditional cost accounting system. The author believes that the method presented in this paper will provide a useful management tool for costing maintenance jobs based on the appropriate selected activity drivers in maintenance workshops. The method could be applied for costing maintenance activities in maintenance of all industrial sectors.

The use of traditional costing method has proven to be distorted by applying overhead uniformly over different jobs of varied complexities and activities scope. In this paper the authors strive to present an effective costing alternative that outperforms the traditional ones with regard to overhead allocation. The paper aims to find reliable and fair maintenance costing method, i.e. to find out the relationships between maintenance activities and cost drivers. Although, ABC is widely used in manufacturing industry, no application or current research has presented an applicable thorough worked-out example, with the exception, to the author’s knowledge, of one in the aeronautical industry, to implement ABC method in maintenance industry. The importance of using this method comes from the fact that it provides, relatively, accurate and fair maintenance bills that provide customer satisfaction and firm good image. Hence, the paper is relevant in this respect and intended to contribute to the practice of maintenance management.

The purpose of this paper is to describe the interactions between accounting and marketing activities in a Taiwanese telecommunication firm by demonstrating the dramatic impact that improved costing methods had on the firm’s customer portfolio management activities and consequently on the firm’s bottom line.

The paper presents a case study of a firm in the highly competitive telecommunications industry in Taiwan. The case study was constructed by interviewing key individuals within the organization over an extended period and supplementing those reports with an analysis of internal company documents.

The firm dramatically increased profitability through the integration of activity-based costing into their customer portfolio framework requiring marketing and accounting functions to work closely together. In this rapidly evolving market, cost allocation and customer portfolio management are indispensable. Identifying accurate costs and keeping key customers is a critical issue for the case company. While theoretically the approach is simple, in practice considerable hurdles needed to be overcome.

While considerable literature suggests that customer profitability drives the management of an organization’s customer portfolio, critical to the success of such an endeavor is the accurate calculation and allocation of costs to individual customers. As an interdisciplinary study, this paper provides insights for both accounting and marketing highlighting their reliance on each other in a sound firm. The results of this paper will serve as a supplement to past customer portfolio management research as well as a reference for any firm seeking to enhance their approach to portfolio management.

Tooling is a common component of an industrial product’s manufacture. Specific tooling is devised to serve the fabrication of a particular product, while generic tooling can be used in the manufacture of multiple products. In the latter case, companies are confronted with the problem of fairly allocating the indirect costs of the tooling. This article studies how to allocate costs of generic tooling to single production orders.

Ten allocation methods (AMs) are described that are in principle suited to the distribution of generic tooling costs to production orders. Since the presented methods have for the most part been discussed in differing contexts, we apply them to a specified generic tooling problem for comparison. Evaluation of the various methods is based on 16 criteria. Reasoning is supported by a computational Monte Carlo simulation. Furthermore, we suggest using the Analytical Hierarchy Process (AHP) to elaborate one final proposition concerning the most preferable allocation scheme.

The article reports the single allocation rules’ performances for different allocation scenarios. The described characteristics refer to fairness, efficiency, and simplicity as well as to empty-core performance. Using AHP analysis allows for the aggregation of the rules’ criteria ratings. Thus, especially suitable allocation schemes for the problem at hand are identified.

An allocation is required for budgeting reasons and also for the definition of projects’ bottom-up sales prices. Selecting the “right” AM is important, as a suboptimal AM can result in unfair allocation vectors, which will act as incentives to stop using the common resource, potentially leading to higher total costs.

Research on the comparison of AMs is typically performed for certain purposes, such as enterprise networks, horizontal cooperative purchasing scenarios, or municipal service units. This article will augment the research evaluating AMs by introducing a novel set of evaluation criteria and by providing an in-depth comparison of AMs suited for the allocation of generic tooling costs.

The product‐costing techniques developed for conventional job shops are unsuitable for use in computer‐integrated manufacturing systems (CIMS) and their continued use in the CIMS environment generates incorrect and misleading manufacturing costs. A new cost model particularly suited for CIMS that also satisfies all financial accounting requirements is described. The model has two components of manufacturing cost, direct material cost and transformation cost, instead of three in the conventional method, and uses actual machine usage to calculate manufacturing costs. To effect accurate allocation of the transformation cost, first to each machine and then to the product that uses the machine, intermediate pooling of costs and different allocation bases are used. A numerical example is presented to clarify the steps in the procedure.

The purpose of this paper is to develop a new systematic method for a multi-unit organization to cope with the cost allocation problem, which is an extension of the reciprocal method. As uncertainty is the inherent characteristic of business environments, assuming changes in engaged parameters is almost necessary. The outputs of the model determine the total value of each unit/business lines or product.

In the proposed method, contrary to existing models, business units are able to transfer their costs to other units, and also, not necessarily transfer the total costs of support units completely. The DEMATEL approach, which finds all relationships between different parts of a system, is also applied for computing effects of the units’ expense paid to each other. Moreover, a fuzzification approach is used to capture linguistic experts’ judgments about related data.

Being closer to the real-world problem in comparison to the previous approach, the proposed systematic approach encompasses the other cost allocation models.

Applying the proposed model for a system like a multi-unit organization, the total price of each unit/business line can be obtained. Moreover, this cost allocation process guides the related decision-makers to better manage the expenses that each unit pays the others.

In the existing studies, business units cannot pay expense support units. However, in the proposed method, the business units are able to pay expenses for other units, and also, not necessarily pay total expenses for support unit completely. Moreover, considering engaged parameters as fuzzy numbers makes the proposed model closer to real-world problems.