An Inventory Model Based on Activity-Based Costing

To analyze the effects of activity-based costing (ABC) on a traditional operation model in an inventory system, a new inventory model based on ABC is developed in this paper. In the new model, based on the ABC perspectives, we will analyze the cost drivers other than the conventional ones specified in the inventory system, and then revise the inventory cost functions by discussing the allocation of the replenishment cost, inventory holding cost and shortage cost according to these cost drivers. Numerical examples are also given to illustrate the new model by comparing it with the traditional model. The results show that the new model can control the inventory costs very well, while using the traditional model can lead to erroneous decisions.