AN ILLUSTRATION: APPLICABILITY OF ACTIVITY BASED COSTING ON SMALL-TO MEDIUM SIZED FIRMS

Abstract

The purpose of this study is to identify the applicability of “Activity Based Costing” in a small-and medium sized companies. Two major cost allocation approaches (i.e., Traditional and Activity Based Costing) were analyzed to indicate results of ABC application has significant differences from the existing cost systems of small-and medium sized companies. A sample of Cypriot Mattress factory: Luksor is selected. Under the light of Cooper hierarchy model, existing system of the factory is analyzed and each unit, batch, product sustaining and facility level activities are assessed. As a results of the research only unit and facility level of activities are observed. Therefore, due to inexistency of batch and product sustaining activities, labor based production process and volume based activities, allocating overhead cost by labor hour cost driver benefits the cost measurements of Luksor Ltd. Furthermore, even if batch and product sustaining level activities had existed, due to low overhead cost proportion, result will not be dramatically different from the existing cost system. Hence, the application of ABC cannot produce better-cost information for this mattress factory, and that the existing cost system and the cost drivers used are appropriate. It can be concluded that, ABC is appropriate and applicable for companies that have large production size and high non-volume related activities such as batch and product sustaining, application of ABC can produce better-cost information.

Keywords

• Activity Based Costing, Small Sized Firms, Medium Sized Firms