Using relative profits as an alternative to activity-based costing

Activity-based costing (ABC) tries to assign overhead costs to cost objects more accurately than traditional cost systems. However, due to its severe separability and proportionality assumptions using ABC for decision-making may lead to a considerable economic loss. To evaluate products on the basis of their activity-based costs, we therefore use a data envelopment analysis (DEA)-like approach which mainly separates the product portfolio into a set of potentially optimal and a set of non-potentially optimal products. In contrast to DEA, we do not need any ad hoc assumptions about the production possibility set or returns to scale. Furthermore, it will turn out that in contrast to conventional ABC, we will not have to determine the cost driver rates ex ante, reducing information cost. (c) 2004 Elsevier B.V. All rights reserved.