| Activity-based Costing (ABC) was originally developed to improve product costing in complex manufacturing environments. The concepts of ABC have been extended to management through Activity-based Management (ABM) and are widely accepted in the management and accounting fields; however, little research has been done on the effects of this new accounting system on the operations research models traditionally used by industrial engineers. ABC is a valuable tool that not only eliminates product cost distortion, but can also provide important information about the manufacturing process.; The cost accounting system is used to allocate the costs of operation to departments, activities and products. Thus it provides the values for the parameters used in engineering decision models and can affect the results of these models. More importantly, the way in which costs are allocated defines the mathematical formulation of the objective function in these models. ABC methodology, with its emphasis on activities and non-volume-based cost drivers, can significantly change the assumptions made in decision models. This in turn can change the objective function and/or the structure of traditional operations research models.; We examine the effect of ABC on inventory lot size (economic order quantity), investment analysis, deterministic scheduling, project management (cost/schedule analysis) and production (product mix and break even analysis). In each case we seek to discover how industrial engineers can use the information provided by ABC to revise and improve these quantitative models. The primary objective is to show how the assumptions made by the accounting system are critical to the formulation of operations research models. Without this insight, the results predicted by these models may not be optimal and may not be validated by the financial results reported in the accounting system. |
