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An Activity Analysis Approach to Unit Costing with Multiple Interactive Products

Author

Listed:
  • Hiroyuki Itami

    (Hitotsubashi University)

  • Robert S. Kaplan

    (Carnegie-Mellon University)

Abstract

Average variable costs are not directly defined for multiple products produced in complex production settings. An activity analysis model can be used for basic cost measurement and for building a linear programming model of manufacturing operations. The model can then be used not only to compute the optimal production plan and associated marginal costs but also to assign average costs to final products. The activity analysis framework enables many overhead costs, such as maintenance, overtime, shift premiums, and indirect labor and materials, to be treated within the model. Thus, they are absorbed directly into the cost of final products rather than allocated indirectly through an overhead charge. Three average costing methods based on sacrifice value (marginal costs) and benefit value (marginal revenue) of products are considered. The method based entirely on the market value of products has less desirable properties than allocation methods which use the dual variables (marginal costs) from the programming model. Another benefit is that various cost allocation methods using input-output analysis can be considered as special cases of average costing methods presented in this paper.

Suggested Citation

  • Hiroyuki Itami & Robert S. Kaplan, 1980. "An Activity Analysis Approach to Unit Costing with Multiple Interactive Products," Management Science, INFORMS, vol. 26(8), pages 826-839, August.
    • Handle: RePEc:inm:ormnsc:v:26:y:1980:i:8:p:826-839
    DOI: 10.1287/mnsc.26.8.826
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    Citations

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    Cited by:

    1. Kaneko, Ikuyo, 1984. "Global Optimization in a Decentralized Decision Making Process," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 19(1), pages 40-54, October.
    2. Tehrani Nejad Moghaddam, Alireza & Michelot, Christian, 2009. "A contribution to the linear programming approach to joint cost allocation: Methodology and application," European Journal of Operational Research, Elsevier, vol. 197(3), pages 999-1011, September.
    3. Klosterhalfen, Steffen T. & Kallrath, Josef & Frey, Markus M. & Schreieck, Anna & Blackburn, Robert & Buchmann, Jan & Weidner, Felix, 2019. "Creating cost transparency to support strategic planning in complex chemical value chains," European Journal of Operational Research, Elsevier, vol. 279(2), pages 605-619.
    4. Lloyd R. Amey & Jean†Louis Goffin, 1988. "Joint product decisions: The variable proportions case," Contemporary Accounting Research, John Wiley & Sons, vol. 5(1), pages 174-198, September.

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