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Aggregation in activity-based costing and the short run activity cost function

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  • Samuel Cruz Alves Pereira

    ()
    (Faculdade de Economia, Universidade do Porto)

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    Abstract

    This paper first identifies the conditions that support the construction of an aggregate output, i.e. the conditions under which a single measure of output can be used to accurately determine cost object incremental costs within a cost pool. This is a significant issue which has not been fully explored in the management accounting literature. Two conditions are jointly necessary and sufficient. The first one is the linear homogeneity property associated with each cost object production function. This condition ensures that costs are linear with output, which is essential if the cost reported by an activity-based costing (ABC) system is also to be a relevant cost for decision?making. The second is that all (cost object) cost driver rates for a given cost pool are equal. This condition guarantees that the cost function at a given activity depends on only one cost driver. The short run structure of ABC is also introduced. It is shown that the fundamental ABC property of linearly between costs and output does not generally hold in the short run, even assuming that technologies are linearly homogeneous. Only under very particular conditions, such as when inputs are combined in completely fixed proportions, are short run costs linear with output.

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    File URL: http://www.fep.up.pt/investigacao/workingpapers/06.01.26_WP199_samuel.pdf
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    Bibliographic Info

    Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 199.

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    Length: 23 pages
    Date of creation: Jan 2006
    Date of revision:
    Handle: RePEc:por:fepwps:199

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    Related research

    Keywords: activity-based costing; aggregate output; cost driver; multi-output technologies; short run activity cost function;

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    1. Hall, Robert E, 1973. "The Specification of Technology with Several Kinds of Output," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 878-92, July-Aug..
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