Applying activity-based costing to production planning with stepwise capacity costs

Activity-based costing (ABC) allocates overhead costs more accurately than traditional cost systems. To evaluate the performance of ABC as a planning instrument we consider two typical situations for which ABC is only capable to achieve approximate solutions. First, we consider the typical case of overhead capacitites that are adaptable only in discrete steps; secondly, we assume that cost drivers do not exhaustively explain the utilization of the overhead capacities. Using a mixed integer program as a benchmark, both cases will be analysed seperately, as well as in their combined effect. It will be shown that, as compared to the benchmark, simple ABC decisions rules may result in a considerable economic loss.