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Cost and error characteristics of three cost accounting system types: Full costing, marginal costing, and activity-based costing

James Craig McLanahan, University of Massachusetts Amherst


With recent advances in manufacturing techniques being introduced into industry, cost accounting assumptions and techniques have been revised. One major innovation among cost systems is Activity Based Costing (ABC). This project was devised to gather comparative data on the performance and operating costs of the three most commonly used costing systems, full cost, marginal cost, and ABC systems. An experimental approach was used. The general ledger, pricing, demand, capacity, and cost aspects of a manufacturing organization were simulated by computer, and various candidate accounting systems were overlaid on the manufacturing system to assess the degree of cost distortions and the mix errors inherent in a simulated product mix optimization. Sixteen cases explored a range of external variables in a four by four design using the proportion of non-volume related overhead and the degree of product diversity as the two variables. Variables explored for the cost system designs include the cost system type, the number of traced accounts, the ratio of traced to total costs, and the number of overhead pools. The experimental runs found very close conformance of the ABC systems to the master costing system, and increasing distortion and mix errors for the marginal and full cost systems in that order. The risk of experiencing a mix error with these systems was also estimated by means of an incidence of error measurement. The errors found experimentally were not as severe as expected from accounts in the literature. An analysis of the run results revealed that if specific runs were selected to illustrate a point, examples of large distortions and mix errors that would seriously impact the profitability of a firm could be found. Estimated costs of system setup and operation were derived for the systems under analysis. These estimates revealed the relatively low cost of the full cost system, the moderate cost of the marginal system and the relatively high fixed cost of the ABC system. Opportunities for pursuing the design of an optimized cost system were suggested by the results of regression analysis on the mix error data and the projections of system operating costs.

Subject Area

Industrial engineering|Accounting|Management

Recommended Citation

McLanahan, James Craig, "Cost and error characteristics of three cost accounting system types: Full costing, marginal costing, and activity-based costing" (1992). Doctoral Dissertations Available from Proquest. AAI9305867.