Modifying Duration-Based Costing to Illustrate the Effect of Fixed Costs

Abstract

This study introduces Modified Duration-Based Costing (MDBC) as an alternative to Duration-Based Costing (DBC) developed in Lelkes and Deis (2013). Both DBC and ABC have a tendency to treat fixed costs as though they were variable. This study expands on the DBC model by showing an alternative way of dealing with fixed costs instead of treating them as variable costs. This study uses analytical methodology and simulations to analyze MDBC relative to an Activity-Based Costing (ABC) system. The results of this study imply that the proportion of fixed costs will affect how close the MDBC cost assignments are to those of ABC. The lower the proportion of fixed costs, the closer the MDBC cost assignments are to those of ABC. MDBC has the potential to be a feasible alternative of ABC. MDBC is valuable if, for decision-making purposes, management wants to keep the effects of fixed costs separate from variable costs. Moreover, using MDBC is less costly and easier to implement, maintain, and update than ABC.

Notes

1. Given a set of inputs, technical efficiency is the ability to achieve the maximum output (Coelli, 1996).

2. From Lelkes and Deis (2013), the number of production runs can consist of one unit to many units.

3. The illustrations presented are similar in layout to those in Lelkes and Deis (2013).

4. The ranges in the random number generator are set differently from Lelkes and Deis (2013) in order to have a new set of simulated data. Different variations in ranges using the random number generator can be useful in providing extra validation of DBC on top of Lelkes and Deis (2013). The ranges for the resource driver amounts and activity driver amounts are set based on if-then statements. The range for the resource driver amounts are set between 0 and 500 for each activity; however, any amount less than 300 is set to zero to have less resource sharing. The range for the activity driver amounts for each product line are set between 0 and 500 for each product line; however, any amount less than 100 is set to zero, to have somewhat less activity sharing. The resource costs are set between $500 and $100,000.

Additional information

Notes on contributors

Anne-Marie T. Lelkes

Dr. Anne-Marie Teresa Lelkes is an Assistant Professor of Accounting at Texas A&M University – Corpus Christi. She earned her Ph.D. in Accounting from Oklahoma State University.