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In: Accounting

Explain some of the uncertainties associated with cost pools (in activity based costing)

Explain some of the uncertainties associated with cost pools (in activity based costing)

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Expert Solution

The standard ABC model lies on the efficient frontier of both cost/benefit plots. This model provides the lowest benefit at the lowest cost. If the system developer and user are confident that the available input data is precise and/or the estimates in use are accurate, it is recommended that they build a standard ABC system that does not incorporate uncertainty into the model.

Fuzzy set theory is recommended as a viable and efficient method for incorporating inherent data uncertainty and imprecision into ABC models. Fuzzy ABC analysis has several advantages over the other uncertain ABC analyses including: 1) relatively low required number of calculations; 2) ability to be designed using spreadsheet software; 3) ease of development (no model parameter setting); 4) no underlying statistical assumptions to adhere to; 5) intuitive and useful results; 6) maintenance of the standard ABC results; and 7) easily adaptable for updating and maintaining. It is important to have Fuzzy ABC system developers and users who are knowledgeable in fuzzy set theory and its underlying concepts in order to build an appropriate model.

ekkarill92 answered 2 years ago
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