An evaluation of activity-based costing and functional-based costing: A game theoretic approach

Scope and method of study. The primary purpose of this study was to analytically evaluate activity-based costing and functional based costing using a game-theoretic paradigm. The ABC and FBC assignments were evaluated against four possible solution concepts suggested by cooperative game theory; the set of imputations, the core, the simple Shapley value and the generalized Shapley value. The development of an operational measure of the degree of product diversity allowed conditions to be identified whereby ABC is identified as a rationally superior cost system. The secondary purpose of this study was an empirical investigation of factors affecting cost assignment choice; increasing degrees of product diversity and the choice of competing activity-based cost drivers for inputs exhibiting the effects of economies of scale. Participants in the empirical analysis were 113 business students at Oklahoma State University. Chi-square tests were used in tests of the hypotheses.; Findings and conclusions. The results of the theoretical analysis identified activity-based costing to be a rationally superior cost assignment system when the degree of product diversity exceeded either of two critical values derived under rationality conditions defined by the set of imputations and the core. The analytical evaluation also revealed a close correspondence between activity-based costing and the generalized Shapley point solution. The results of the empirical analysis indicated that the degree of product diversity was not significantly associated with cost assignment choice. Results of chi-square analysis indicated that financial drivers were chosen significantly more often than transaction/duration drivers for inputs exhibiting the effects of economies of scale.