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This study extends the theoretical analyses of Duration-Based Costing (DBC), an alternative cost measurement system to Activity-Based Costing (ABC). DBC is simpler than ABC and uses the production cycle time to assign costs. This simplicity should allow DBC to be a better costing method for multiproduct firms that exhibit nonconstant returns to scale.

Data simulations for 1,000 cases and Data Envelopment Analysis (DEA) are used to analyze the production functions inside DBC and ABC models to determine their relative technical efficiency.

The results show that, for a given set of simulations, DBC shows more nonconstant returns to scale than does ABC. This corroborates prior research and suggests that a more complex costing system, such as ABC, may not always match the production technology of a multiproduct firm. Thus, DBC may have a higher level of accuracy than does ABC for firms that exhibit nonconstant returns to scale.

Since DBC has only recently been theoretically developed, this study is the first to analyze the relative technical efficiency of DBC compared to ABC.

This study should bring some further awareness of the implications of alternative costing methods. The limitation of DBC is that it does not capture other factors not driven by the production cycle time that could be necessary for management decision making. However, DBC is better for multiproduct firms than a more complicated costing system and does help decision makers determine whether the production process is operating efficiently. It is imperative that firms choose which costing methods fit the firm’s needs and economic structure.

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.

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.

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.

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

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.

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.

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.

This study develops a theoretical Weighted Average ABC model by taking ABC information and rearranging it to enhance decision-making effectiveness.

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.

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.

Weighted Average ABC may increase decision-making effectiveness in situations when managers need to make fast decisions.

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.