Decision orientation of activity-based costing

Activity-based costing (ABC) is given much attention in the literature. Most authors seem to agree that improved cost allocations are useful to indicate the long-term profitability of products. However, a controversy starts when the relevance of ABC for short-term decision-making is discussed. This topic is addressed here and some of the arguments found in the literature are reviewed. The first objective is to contribute to discussions on the usefulness of ABC for decision-making. In this paper it is suggested that ABC can be relevant for short-term decisions. It is suggested here that particular costs and revenues become controllable by making a particular decision, even if these costs and revenues appear to be uncontrollable a priori. This concept should be considered as a hypothesis which still needs to be tested. The second objective is to contribute to the literature on why managers use cost allocations for decision-making instead of only controllable costs and revenues. It is discussed that uncertainty about controllable costs and revenues will stimulate a manager to use cost allocations for decision-making. Allocated costs provide a reference point which helps a manager to resolve how much risk he or she is willing to take. This has been confirmed in an experiment, reported in Wouters (1993).