Activity-Based Parsimonious Cost Systems

Accurate product costing information is instrumental in effective decision making, especially for product related decisions, such as product mix and product emphasis. A body of literature suggests that activity-based costing plays an important role in providing accurate product costing information. However, activity-based costing systems are also more complex due to the number of cost drivers identified, compared to traditional single cost driver systems. We propose a modification to the activity-based costing system that reduces the complexity. Using the concepts of linearly independent and dependent vectors, it is shown that it is possible to identify parsimonious systems that simplify an activity-based costing system without loss of accuracy. The modification presented in this study will entice more firms to adopt an activity-based costing system and reap the benefits of increased product costing accuracy.