The Choice of Cost Drivers in Activity-Based Costing: Application at a Chinese Oil Well Cementing Company.

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The Choice of Cost Drivers in Activity-Based Costing: Application at a Chinese Oil Well Cementing Company. In recent years, activity-based costing (ABC) has become a popular cost and operations management technique to improve the accuracy of product or service costs for firms to stay competitive. ABC costing is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs (overhead) into direct costs. The study identifies the limitations of traditional cost accounting, which uses one single cost driver such as direct labor or output volume to allocate the overhead costs, and subsequently distorts product costs in modern manufacturing environments. Further, the study recommends how to choose the appropriate cost driver of fuel overhead costs when adopting ABC costing methods. Researchers went to Xi'an China to collect a sample data on fuel overhead cost, number of wells, well-depth, distance, weight, and ton-kilometers at a Chinese oil well cementing company – the data was verified with the company controller to ensure accuracy. This included studying its existing, traditional costing system and determined costs for direct materials, overhead costs, fuel consumption, traveling cost, labor cost, motor vehicle, and equipment costs. Additionally, the company’s organizational structure needed to be examined. Secondly, the researchers compiled the company’s activities and activity cost pools - the team finds that the transportation activity overhead cost is the most important cost for company management to control. The transportation activity includes packing, loading, and transporting the direct materials and the equipment needed for well drillings from the company office to the oil well field. Thirdly, the researchers determined that there are five possible cost drivers that cause the fuel cost to...
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