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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. Two authors went to Xi'an area 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. We also verified the data accuracy with the company controller. This study investigates how to choose the appropriate cost driver of fuel overhead costs when adopting ABC . Using the linear regression analysis and the maximum r-square improvement (MAXR) model selection method, the empirical results show that among the five possible cost drivers of the number of wells, the distance from the office to the field, the weight of the cement and additive materials, the depth of well cementing, and the ton-kilometers measured by the product of the distance and the weight, the best cost driver is the product of the distance and the weight. Thus, by applying the ABC system and using the product of the distance and the weight as the cost driver will improve the fuel cost allocation accuracy among individual wells.
I. Introduction
Traditional cost accounting, which mainly uses one single cost driver such as direct labor or output volume to allocate the overhead costs, systematically distorts product costs in modern manufacturing environments in which overhead costs are a significant portion of product costs. Incorrect product cost information can lead to poor decisions. Activity-based costing (ABC) was developed by General Electric and other firms to improve the usefulness of accounting information (Johnson, 1992).
Cooper (1988a) also pointed out that with the increasing diversification of product volume, size, and complexity, the calculated product costs would be deeply distorted under the traditional volume-based costing system. As a result, most of the attention has been directed to the design of ABC, which regards activity as the cause of resource assumption and develops multiple cost drivers through the measurement of activity (Johnson 1992; Cooper and Kaplan 1988a, 1988b; Cooper 1988a, 1988b, 1989a, 1989b, 1990a, 1990b; Kaplan 1988; andTurney 1992).
After ABC had been implemented in practice for many years, case studies were widely prepared to identify the difference between ABC and the traditional costing...