| Activity-based costing (ABC) was developed as a solution to product cost distortion caused by the use of traditional costing system (TCS). Its ability to allocate overhead costs more accurately than TCS, via the emphasis of activities and a variety of cost drivers, has been acknowledged among researchers. Cost accounting system is important to industrial engineers in that it provides the values for the parameters used in various industrial engineering and operations research (OR) models and can impact the results of these models. Furthermore, the way in which costs are allocated defines the problem formulation of the models. New costing methodology can change the assumptions, the objective function and/or the structure of the models. In this research, we examine the effect of ABC on four fundamental OR models: inventory system, investment analysis, costs of quality, and scheduling. In each case, we investigate how the information provided by ABC can affect and improve traditional OR models. In the order-level-lot-size inventory system, based on ABC perspective we discuss potential cost drivers other than those conventionally specified and then revise cost functions, where necessary, to accommodate these cost drivers. In investment analysis, the optimal decision is to select investment alternatives that yield high financial returns, effectively improve performance and support strategy of the company under a limited budget. ABC methodology helps us formulate the problem by linking financial and other performance measures to the strategic objectives through activities. In costs of quality, by exercising ABC concept, appropriate cost drivers are determined, and quality costs are then allocated to items according to these cost drivers, rather than volume cost drivers (direct labor, direct material, or machine hours) traditionally used for the allocation of indirect costs including quality costs. Lastly, in scheduling, we formulate and solve the two-machine flow shop problem for a schedule that simultaneously optimizes production performance and cost, specifically, makespan and work-in-process cost, which is calculated based on ABC information.; Numerical examples and results are given to illustrate the models and to show the effect of ABC on these OR models, compared with the traditional approach. The results reveal that if a company adopts ABC system while the operational departments make a decision based on traditional models, then the decision will be erroneous and unfavorably impacts the company. The decision based on improper use of the traditional model would mislead the company that it is the most profitable solution. In fact, using the traditional model results may lead to non-optimal cost and performance, or result in financial loss to the company. |
