abc cost accounting case study analysis

What is Activity-Based Costing?

Labor hours vs. activity-based approach, unit cost card using labor approach, activity-based approach to determine overhead, unit cost card using activity-based approach, download the activity-based costing template, benefits of activity-based costing, additional resources, activity-based costing.

Allocating overhead costs based on “activities” that actually contribute to overhead costs

Activity-based costing is a more specific way of allocating overhead costs based on “activities” that actually contribute to overhead costs. In job-order costing and variance analysis , overhead costs are applied based on a specific cost driver such as labor hours or machine hours.

An activity is an event, task, or unit of work with a specific purpose, whether it be designing products, setting up machines, operating machines, or distributing products. Therefore, activity-based costing considers all the potential activities instead of relying on just one variable (for example, labor hours or machine hours).

Generally, activity-based costing is used in the manufacturing industry, as it produces more accurate cost data, generating values that are close to the true cost and can be identified during the production phase.

Activity-based costing serves and complements many other analyses and measures, including target costing, product costing, product line profitability analysis, service pricing, and more. Thus, it is used to better understand the company’s true costs, and thereby formulate an appropriate pricing strategy to mitigate unnecessary expenses.

Key Highlights

• Activity-based costing is a way of allocating overhead costs based on “activities.” This differentiates it from job-order costing, which allocates costs by a specific cost driver like machine hours.
• An activity is an event, task or unit of work with a specific purpose, whether it be designing products, setting up machines, operating machines or distributing products.
• Activity-based costing considers all potential cost activities instead of relying on just one variable (labor hours or machine hours).

Let take a look at the following example to compare the differences:

XYZ Company manufactures and sells two types of tables: Standard and Luxury. Annual sales, direct labor hours, and total direct labor hours per year are provided below:

Costs for materials and labor for each table are provided below:

Manufacturing overhead costs total $800,000 every year. The breakdown of these costs among the company’s six activity cost pools is given below. The following six activities contribute to overall overhead costs.

Using the predetermined overhead rate approach with labor hours, the predetermined overhead rate is equal to $16 per labor hour ($800,000 / 50,000 labor hours). Using this information, we can design a cost card for each product.

Using the activity-based costing approach, we can determine overhead rates for each activity that is relevant to production. The activities listed below are given in this example but companies usually break down the relevant activities.

Next, for each product, we can use the calculated overhead rates to determine the overhead numbers:

Under the activity-based approach, the unit cost card gives different unit product costs for each product.

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Activity-based costing (ABC) can affect the cost distribution process in three ways:

• The allocation of overhead costs is more accurate and precise as they are separated and grouped into pools based on the number of activities. To simplify, rather than calculating the indirect expenses of the company by pooling all costs together, ABC pools costs based on activity.
• Activity-based costing traces previously untraceable costs, such as depreciation, to particular activities.
• The ABC method can also change the unit cost of low-volume products by transferring overhead costs from high-volume products.

By comparing the first unit cost card (i.e., when manufacturing overhead is applied based on just one variable: direct labor hours) and the second unit cost card (i.e., when manufacturing overhead is applied based on several important activities), we can see that the unit product cost for each product is generally similar. However, the activity-based approach is the more specific and precise way that companies will allocate their manufacturing overhead costs.

For the standard product, we can see that the manufacturing overhead cost per unit is much lower for the regular labor-based approach. In producing the product, more overhead costs were actually put into the process than estimated by the labor approach.

In contrast, for the luxury product, manufacturing overhead costs based on labor hours were higher when compared to the activity-based approach. When considering all relevant activities, overhead costs in manufacturing each product are actually less than that estimated by labor hours only.

Therefore, even though labor hours or machine hours may be a good starting point for companies to get a general idea of potential overhead costs, they can use activity-based costing as an alternative if they are looking to get a more exact assessment of overhead.

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Activity-Based Costing

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Many companies have expressed frustration with arbitrary allocations associated with traditional costing methods. This has led to increased utilization of a uniquely different approach called activity-based costing (ABC) . A simplified explanation of ABC is that it divides production into core activities, defines costs for those activities, and allocates those costs to products based on consumption of the activities.

Benefits Of ABC

Activity-based costing attempts to overcome the perceived deficiencies in traditional costing methods by more closely aligning activities with products. This requires abandoning the traditional division between product and period costs, instead seeking to find a more direct linkage between activities, costs, and products. This means that products will be charged with the costs of manufacturing and nonmanufacturing activities. It also means that some manufacturing costs will not be attached to products. This is quite a departure from traditional thought.

With ABC a product is only charged with the cost of capacity utilized. Idle capacity is isolated and not charged to a product or service. Under traditional approaches, some idle capacity may be incorporated into the overhead allocation rates, thereby potentially distorting the cost of specific output. This may limit the ability of managers to truly understand and identify the best business decisions about product pricing and targeted production levels.

Limiting Factors

The fact that ABC is not GAAP usually means that a company that wishes to benefit from ABC must develop one costing system for external reporting and another for internal management. Another disadvantage of ABC is that it is usually more involved than other approaches. Rather than applying all factory overhead on some simple basis such as labor hours, it requires the development of numerous cost pools that must be individually allocated.

Catalyst For ABC

Another driver of ABC-type approaches has been the advent of computer technology. Before modern information systems, it was very expensive to manipulate data. Most firms were necessarily content to live with simple approaches that allocated factory overhead on a single basis. The ease with which data can be managed under a sophisticated information system greatly reduces the cost, and error rate, associated with ABC. It is not surprising that the method’s popularity is inversely related to data processing costs.

This chapter will close with a case study on ABC. The case will show how results can differ significantly under ABC versus traditional costing methods. The lesson is to move carefully in using cost information. It is important to fully consider many variables, some of which are not always apparent. Managerial accounting provides many tools to support decision making. ABC is one such tool. It enables a systematic review of activities that will help pinpoint opportunities for cost control and reallocation of capacity to higher yielding products. But, ABC is not perfect. In fact, ABC is no better than the process used to identify activities and cost allocations. These elements are ultimately based on human judgment.

A Closer Look At ABC Concepts

With traditional costing methods, prime costs are traced to output while factory overhead is allocated to output. Non-factory costs do not get assigned to a product:

Compare this traditional logic to ABC, and one sees a reversal of the thought process. With ABC, cost objects are broadened to include not only products/services, but also other objects like customers, markets, and so on. These “cost objects” are seen as consuming activities . The activity driver is the event that causes consumption of an activity. For instance, each customer may receive a catalog, whether he or she orders or not during a period. Preparation and distribution of the catalog is the “activity” that is being driven by the number of customers. Activities necessarily consume resources. Thus, preparation of a catalog will require labor, printing, office space, etc. Thus, activities drive the need for resources and are said to be resource drivers . The following graphic reveals the conceptual notion of ABC for two types of cost objects, which is quite different and much more involved than the traditional costing approaches. In reviewing the graphic, notice that costs that are directly traced to a cost object need not be “routed” through an activity:

A business might have dozens of cost objects, hundreds of activities, and numerous resource pools to evaluate. A diagram of the interconnectivity can reveal multiple cost objects feeding off of many shared activities that in turn use up various resources.

The Steps To ABC

ABC requires several steps for a successful implementation:

• STUDY PROCESSES AND COSTS — The first step is a detailed study of all business processes and costs. This extensive study will usually involve employees from throughout the organization. Employee involvement is crucial for acceptance of the measures produced by the system. Employees need to believe the results of the accounting system before they will truly rely on the results.

• Batch-level activities are those activities that must be performed, but can relate to one or more units of output. In some cases, shipping can be seen as an excellent example of a batch process. Assume that Nile is an online bookstore. Some customers order only one book while others may order a dozen books at a time. In each case, the customer’s books must be packaged and shipped. Roughly the same activity is required independent of how many books are put in a box.
• Product-level activities are carried out at the product level, no matter the volume of production. Product design and marketing are activities that may have a one-to-one relation to the number of end products.
• Customer-level activities can take many forms. These include technical support help lines, catalogs, sales calls, and so on.

Other activity levels might be appropriate. Some businesses will identify market-level activities . For example, most global companies contract with an independent customs broker within each market served. Thus, the cost of customs brokerage services can be seen as a function of markets served. There are also entity-sustaining activities . For example, a public company in the USA must incur substantial costs to comply with Sarbanes-Oxley legislation. The preceding “levels” provide a frame of reference that is helpful in considering the important activities unique to an organization. As a general rule, a company would (1) develop a list of every conceivable activity, (2) segregate the activities according to level, and (3) look for logical ways to combine similar activities within each level.

Some resources are consumed, and no one can agree as to the cost object that should absorb the resource. For example, what object should bear the cost of landscaping the corporate office? Suffice it to say that the cost allocation decisions can be contentious, and some costs may never find a logical home. Therefore, ABC may leave some costs as unallocated. Unallocated does not mean to “ignore.” While it may be perfectly logical to leave some costs as unallocated for purposes of identifying the cost of a specific product or other cost object, it would be foolhardy to forget about those costs in overall management of the organization.

• APPLY COSTS TO OBJECTS — The final step is to utilize the activity-based rates in determining the amount of activity cost to allocate to each cost object. The allocated cost from the catalog preparation pool was $2.50 per unit. This is not the total cost; this is just the allocated amount. The total cost would also include the directly traceable amounts (printing, postage, etc.). This catalog cost, along with other customer-related costs, would be compiled in a summary report. Managers would then have a measure of how much it costs to support one additional customer. Similarly, measures would be produced for each additional cost object.

The objective of ABC is to derive improved measures of cost. By introducing activity cost pools, one is better able to allocate the costs (resources) to end objects (products, customers, etc.). The necessary steps to develop an ABC system are summarized as follows:

David Eng enjoys listening to music while playing golf and formed the Golf and Music Enthusiast Company (GAME).

GAME developed two specialized products. The first product is GLASSESong, a pair of sunglasses with a built-in speaker. The other is CAPlayer, a golf cap with a built-in speaker. Both products connect wirelessly to a personal device.

GAME has been employing traditional costing methods and applies factory overhead on the basis of labor costs. The products sell as fast as they can be produced so there is virtually no inventory. For a recent period CAPlayer sold 90,000 units and GLASSESong sold 110,000 units. Each unit sells for $60 and total sales were $12,000,000 ((90,000 + 110,000) X $60).

David Eng’s latest frustration is with the CAPlayer. It is reportedly much more expensive to produce than GLASSESong. Following is an analysis of GAME’s cost of production by product.

SG&A totaled $600,000. This resulted in a $400,000 profit, as shown. Nevertheless, the per unit data suggest that the CAPlayer is losing money because the sales price is below the $64.44 unit cost. Eng has employed a consultant to review costing techniques. The consultant used ABC and concluded that CAPlayer is more profitable than GLASSESong.

Study Processes And Costs

• Product costs were $11,000,000 and SG&A $600,000 as shown in the analysis.
• The core components are the same for each device.
• GLASSESong requires added material related to polarized lenses and CAPlayer requires added direct labor for sewing.
• Both devices are produced in batches on the same automated assembly line, at the same pace, and through similar steps.
• Automated machinery is leased from Rebel Robotics, which bases its rental charges on a “units processed” basis.
• There is one production line, and it must be “set up” for each production batch.
• CAPlayers are produced in batches of 900 and GLASSESongs are produced in batches of 550 units. As a result CAPlayer required 100 setups (90,000 units/900 units per setup) and GLASSESong required 200 setups (110,000 units/550 units per setup).
• Both products were designed by an internal development team.
• A tech support department has been established to help customers download music to their devices. The CAPlayers are sold and supported only through the world’s 1,000 most exclusive golf courses. The golf pros at these courses usually call once to learn the product and require no further assistance. The GLASSESong units are sold over the internet, and individual purchasers average one call per unit sold.

Identify Activities

After carefully studying GAME Company, the consultant identified four unique activities. Each of these activities was a significant consumer of resources and generated substantial costs. The robotics function related to the operation of the highly automated assembly line. A large part of the cost of robotics was tied directly to the number of units produced. Production setup was a batch level activity. The company was required to set up the assembly process for each batch of caps and glasses. Tech support was driven by the number of customers. Each purchaser of the glasses was identified as a “customer” and each golf course was identified as a “customer.” The activity driver for product design is the number of products.

Allocate Costs

Of the total costs, direct material and direct labor were traceable directly to the product cost object. The other costs were either deemed attributable to one of the four activities, or otherwise not allocated.

The following spreadsheet was prepared based on careful analysis, interviews, and meetings. Columns C, E, G, and I show the percentage of each cost category attributable to each of the four activities. Column K reveals the proportion of each cost that is not allocated. The costs from Column B are multiplied by the percentages to make allocations to each cost pool. For example, 12% of the total indirect material is allocated to robotics ($100,000 from cell B7 X 12% from cell C7 = $12,000 found in cell D7). This process is repeated for each cost and results in the allocations shown.

Determine Per-Activity Rates

The total cost for each activity pool is divided by the activity quantity metric. For example, robotics cost $2,200,000 and 200,000 units were produced. Thus, this activity cost is $11.00 per unit. This calculation is repeated for each activity cost pool, and is summarized in the following schedule.

Apply Costs To Cost Objects

The final step is to analyze results. The top portion of the following analysis applies the per-activity cost information to show how the total cost of CAPlayer is less than the total cost of GLASSESong. The lower portion compares costs and revenues to determine product profitability. Unallocated cost is included in the total column only; it is important, but not tied to either product. Product profitability is portrayed differently under alternative costing methods. Traditional costing applied overhead based on direct labor, which is a small portion of the environment. The point is that skill is required to interpret any costing information.

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Tapping the Full Potential of ABC

• Joseph A. Ness
• Thomas G. Cucuzza

Chrysler and Safety-Kleen are models for how to get employees to embrace activity-based management.

Many companies have used activity-based costing (ABC) in onetime profitability studies to help them decide which products or customers to cut or keep. But ABC can be much more than a superior accounting technique that shows how much money individual products are really making or losing. When ABC is woven into critical management systems, it can serve as a powerful tool for continuously rethinking and dramatically improving not only products and services but also processes and market strategies.

• JN Joseph A. Ness is a partner in Price Waterhouse’s financial- and cost-management consulting practice and is based, in St. Louis, Missouri. He advises manufacturing and service companies on how to implement advanced cost-management systems.
• TC Thomas G. Cucuzza is a senior manager in Price Waterhouse’s financial-and cost-management consulting practice and is based, in Cleveland, Ohio. He advises manufacturing and service companies on how to implement advanced cost-management systems.

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Activity Based Costing Harvard Case Solution & Analysis

Home >> Accounting Case Solutions >> Activity Based Costing

INTRODUCTION

1.1         Background of the Study

Since its introduction Activity-based costing (ABC) has been quite an underutilized concept in most of the emerging and developing countries despite the tremendous success of the refined costing system that has actually provided effective information for the cost management. It is basically an accounting method, which has allowed all businesses to gather data about their particular operating costs. Under this system, costs are basically applied or assigned to specific activities such as manufacturing, engineering and planning where the activities are associated with various kinds of services and products. Basically, ABC method enables a business to make decisions on all the different products and services along with the resources that are the driving force towards the profitability and the factors or elements that contribute towards losses. Therefore, ABC helps in generating data that creates a better budget and gains a greater overall understanding of the various expenses that are required to keep the company running in a smooth manner. Generally, Activity-based costing is the most effective mode when used over a long period of time (Kaplan, 2007).

Activity-based costing has emerged and gained competitive edge through the period of 1980s as a mean, which basically measures all of the business costs quite accurately and then associate them to goods and services that are produced. Prior to this method of costing, traditional costing accounting methods have been designed for different companies that are operating since the early 20 th  century. This was the time when direct materials and labors were the two main largest costs that were associated with the production of different services and goods. This was the time when little automation at the end time and overhead costs were quite small as a percentage of the overall total costs. Moreover, many companies have offered a very small and narrow range of products and services. All this has changed in the middle of the century. Automation has been incorporated into all the different overhead costs and businesses that rose with the support of the services that are needed to design and manage the automation, which were removed for the production. For a long period of time, traditional costing accounting standards or methods have also stayed in the place. Companies have continued to measure the primary costs of materials and direct labor that have allocated the overhead costs that are to some extent arbitrarily. Over the period of time, overhead costs have grown as the share of total costs where distortions have grown considerably (Garrison, 1999).

With changing business conditions and business model, Robert S. Kaplan who is a professor from Harvard Business School came up with the idea or the need to develop a more sophisticated and comprehensive business model to allocate cost that can directly be linked to the services and goods produced by the business. The costing system which is called the Activity-based costing is basically based on the fundamental that the majority of business activities are supported in the production of goods and services. To get the true and complete picture of the cost of producing services or goods, one must allocate different cost of business activities to specific services and products. The Activity-based costing method does this by assigning corporate and factory overhead as well as all the other indirect resource costs  (Kaplan, 2007).

1.2         Statement of the Problem

There are significant and various problems with the implementation of ABC process and this study will help in investigating the actual problem that will help in implementing the ABC system. This research will evaluate the importance of the application of ABC among companies and what features can be gained by implementing such a developed system. This study will also discuss the differences between the ABC costing system and the traditional system and it will identify the main issues related to the traditional system and its application (Joshi, 2001).

1.3         Review of Research Literature

Companies all around the world have been using the Activity-based costing. Along with this, it is considered as one of the most important innovations in recent times in cost calculations and the managerial accounting. ABC has developed an approach to address various problems that have been associated with the traditional cost management systems, which lean to have the inability and inaccessibility to firmly determine actual production and service costs and provide the useful information for the various operating decisions (Messner, 2009). The above deficiencies that the managers have been exposed to the decision making based on the inaccurate data results in higher exposure for different companies with multiple products and services. The new system of costing that is the Activity-based costing over a short period of time has evolved as the highest level of interest for the professionals in the industry and the academic practitioners since 1980s (Garrison, 1999).....................

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Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This cost accounting method recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs—such as management and office staff salaries—are difficult to assign to a product.

Key Takeaways

• Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. 
• This system of cost accounting is based on "activities"; an activity is any event, unit of work, or task with a specific goal.
• All activities are cost drivers: Purchase orders and machine setups are examples of activities. 
• The cost driver rate, which is the cost pool total divided by the cost driver total, is used to calculate the amount of overhead and indirect costs related to a particular activity. 
• ABC is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

Investopedia / Theresa Chiechi

Activity-based costing (ABC) is mostly used in the manufacturing industry. It enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process.

This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing. Activity-based costing is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

The formula for activity-based costing is the cost pool total divided by the cost driver, which yields the cost driver rate. The cost driver rate is used in activity-based costing to calculate the amount of overhead and indirect costs related to a particular activity. 

The ABC calculation is as follows:  

• Identify all the activities required to create the product. 
• Divide the activities into cost pools, which include all the individual costs related to an activity. Calculate the total overhead of each cost pool.
• Assign each cost pool activity cost drivers, such as hours or units.
• Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers.
• Multiply the cost driver rate by the number of cost drivers. 

As an activity-based costing example, consider Company ABC, which has a $50,000 per year electricity bill. The number of labor hours has a direct impact on the electric bill. For the year, there were 2,500 labor hours worked; in this example, this is the cost driver. Calculating the cost driver rate is done by dividing the $50,000 a year electric bill by the 2,500 hours, yielding a cost driver rate of $20. For Product XYZ, the company uses electricity for 10 hours. The overhead costs for the product are $200, or $20 times 10.

Activity-based costing benefits the costing process by expanding the number of cost pools that can be used to analyze overhead costs and by making indirect costs traceable to certain activities. 

The ABC system of cost accounting is based on activities, which are any events, units of work, or tasks with a specific goal—such as setting up machines for production, designing products, distributing finished goods, or operating machines. Activities consume overhead resources and are considered cost objects.

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, consumed power, purchase orders, quality inspections, or production orders.

There are two categories of activity measures: transaction drivers, which involve counting how many times an activity occurs, and duration drivers, which measure how long an activity takes to complete.

Unlike traditional cost measurement systems that depend on volume count, such as machine hours and/or direct labor hours, to allocate indirect or overhead costs to products, the ABC system classifies five broad levels of activity that are, to a certain extent, unrelated to how many units are produced. These levels include batch-level activity , unit-level activity, customer-level activity, organization-sustaining activity, and product-level activity.

Activity-based costing (ABC) enhances the costing process in three ways. First, it expands the number of cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one company-wide pool, it pools costs by activity. 

Second, it creates new bases for assigning overhead costs to items, so costs are allocated based on the activities that generate costs, instead of on volume measures—such as machine hours or direct labor costs. 

Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—such as depreciation , utilities, or salaries—traceable to certain activities. Alternatively, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products.

There are five levels of activity in ABC costing: unit-level activities, batch-level activities, product-level activities, customer-level activities, and organization-sustaining activities. Unit-level activities are performed each time a unit is produced. (For example, providing power for a piece of equipment is a unit-level cost.) Batch-level activities are performed each time a batch is processed, regardless of the number of units in the batch. Coordinating shipments to customers is an example of a batch-level activity.

Product-level activities are related to specific products; product-level activities must be carried out regardless of how many units of product are made and sold. (For example, designing a product is a product-level activity.) Customer-level activities relate to specific customers. An example of a customer-level activity is general technical product support. The final level of activity, organization-sustaining activity, refers to activities that must be completed regardless of the products being produced, how many batches are run, or how many units are made.

The goal of ABC costing is to optimize business activities and processes to enhance efficiency and reduce costs. It seeks to identify the highest cost drivers: the activities and processes that consume the most of a company's resources.

ABC costing is calculated by finding the total cost pool and dividing it by the cost driver. The cost pool is an aggregate of all the costs associated with performing a particular business task, such as making a particular product. Cost drivers are labor hours, machine hours, and customer contacts.

Activity-based costing (ABC) is a costing method that directly ties all overhead and indirect costs to specific products and services.

Activity-based costing recognizes the relationships between costs, overhead activities (all events, tasks, or units of work with a specific purpose), and manufactured products. The goal of activity-based costing is to understand a company's true costs and reduce inefficiencies by identifying the highest cost drivers: the activities and processes that consume most of a company's resources.

Chartered Global Management Accountant. " Activity-Based Costing (ABC) ."

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A Comparative Analysis and Implementation of Activity Based Costing (ABC) and Traditional Cost Accounting (TCA) Methods in an Automobile Parts Manufacturing Company: A Case Study

Global Journal of Management and Business Research, Accounting and Auditing, Volume 13 Issue 4 Version 1.0 Year 2013

11 Pages Posted: 28 Apr 2016

Nitin Kumar

Green Hills Engineering College

D. G. Mahto

Date Written: 2013

Activity based costing (ABC) is a method for determining true costs; which has become an important aspect of manufacturing/service organizations and can be defined as a methodology that measures the cost and performance of activities, resources and cost objects. It can be considered as an alternative method to traditional cost accounting systems. In this paper we have shown a comparative analysis of application of ABC method with traditional cost accounting (TCA) method in an automobile parts manufacturing company; which would like to increase the sales due to increased demand. For this reason the company needs to know the true cost of the parts prior to deciding as which item is to be produced more.

Keywords: activity based costing, cost drivers, traditional cost accounting

JEL Classification: M00

Suggested Citation: Suggested Citation

Green Hills Engineering College ( email )

Nahan Road, Gandhigram Kumarhatti P.O. Baholi Solan, Himachal, Pradesh 173229 India

Dalgobind Mahto (Contact Author)

SP-43, RIICO Industrial Area Kukas Jaipur, Rajasthan 302028 India 8058799995 (Phone) 8058799995 (Fax)

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Activity-based costing (abc) and its implication for open innovation.

1. Introduction

2. literature review, 3.1. data collection (and organisation) procedures, 3.2. procedures applied in content analyses, 4.1. activity based costing global research performance, 4.1.1. database description, 4.1.2. publications every five years, 4.1.3. annual scientific production, 4.1.4. authors production over time, 4.1.5. three fields plot, 4.1.6. institutions cooperation, 4.1.7. network research by authors, 4.1.8. network research by countries, 5. discussion: the abc and open innovation, 6. conclusions, author contributions, institutional review board statement, informed consent statement, data availability statement, acknowledgments, conflicts of interest.

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Quesado, P.; Silva, R. Activity-Based Costing (ABC) and Its Implication for Open Innovation. J. Open Innov. Technol. Mark. Complex. 2021 , 7 , 41. https://doi.org/10.3390/joitmc7010041

Quesado P, Silva R. Activity-Based Costing (ABC) and Its Implication for Open Innovation. Journal of Open Innovation: Technology, Market, and Complexity . 2021; 7(1):41. https://doi.org/10.3390/joitmc7010041

Quesado, Patricia, and Rui Silva. 2021. "Activity-Based Costing (ABC) and Its Implication for Open Innovation" Journal of Open Innovation: Technology, Market, and Complexity 7, no. 1: 41. https://doi.org/10.3390/joitmc7010041

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A COMPARATIVE ANALYSIS OF COST-VOLUME- PROFIT (CVP) ANALYSIS AND ACTIVITY-BASED COSTING (ABC) IN IMPROVING MANAGERIAL DECISION-MAKING

• University of Information Technology Yangon Myanmar

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Application of material flow cost accounting (MFCA) in waste reduction: a case study on small and medium-scaled enterprise (SME) corrugation packages industry

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• Published: 05 August 2024

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• Naveed Ahmed 1 ,
• Muhammad Asad Ali   ORCID: orcid.org/0000-0002-0370-2118 2 ,
• Muhammad Sana   ORCID: orcid.org/0000-0003-1613-4188 2 ,
• Madiha Rafaqat 1 &
• Ateekh Ur Rehman 3  

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Nowadays, due to inadequate resource utilization and a lack of comprehensive accounting procedures, many firms face substantial issues in controlling their environmental and cost-related implications. As the global emphasis on sustainability and resource efficiency grows, there is an increasing need for Material Flow Cost Accounting (MFCA) adoption to meet these concerns. In this case study, a small and medium-scaled enterprise (SME) i.e., Corrugation Packages Industry in Pakistan has been selected. The formation of a corrugation box has been considered to evaluate the process waste based on MFCA analysis. The identified areas with high negative costs and their reasons are also elaborated with proposed MFCA-based solutions. The positive and negative costs of entire process have been further examined by material cost (MC), system cost (SC), energy cost (EC), and waste management cost (WC). By successful implementation of the MFCA, it has been found that an improvement in the total cost of about 11.11% (MC), 29.61% (SC), 9.32% (EC), 92.57% (WC) have been obtained, whereas the enhancement in positive costs of about 9.82% (MC), 31.31% (SC), 9.88% (EC), 95.08% (WC) have been recorded, and reduction in negative costs of about 29.50% (MC), 36.56% (SC), 35.52% (EC), and 69.83% (WC) have been noted.

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Acknowledgements

The authors are thankful to King Saud University for funding this work through Researchers Supporting Project number (RSPD2024R701), King Saud University, Riyadh, Saudi Arabia.

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Department of Industrial Engineering, College of Engineering and Architecture, Al-Yamamah University, 11512, Riyadhm, Saudi Arabia

Naveed Ahmed & Madiha Rafaqat

Department of Industrial and Manufacturing Engineering, Faculty of Mechanical Engineering, University of Engineering and Technology, Lahore, 54890, Pakistan

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Ateekh Ur Rehman

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Naveed Ahmed: investigation, formal analysis, visualization, writing—original draft. Muhammad Asad Ali: conceptualization, data curation, methodology, investigation, formal analysis, visualization, software, writing—original draft, writing—review and editing. Muhammad Sana: investigation, methodology, formal analysis, software, visualization, writing—original draft, writing—review and editing. Madiha Rafaqat: formal analysis, writing—review and editing. Ateekh Ur Rehman: formal analysis, funding acquisition, writing—review and editing.

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Ahmed, N., Ali, M.A., Sana, M. et al. Application of material flow cost accounting (MFCA) in waste reduction: a case study on small and medium-scaled enterprise (SME) corrugation packages industry. J Mater Cycles Waste Manag (2024). https://doi.org/10.1007/s10163-024-02039-w

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Received : 15 November 2023

Accepted : 23 July 2024

Published : 05 August 2024

DOI : https://doi.org/10.1007/s10163-024-02039-w

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