An evaluation of activity-based costing and functional-based costing: A game-theoretic approach

This study develops a theoretical product cost framework independent of cost assignment concepts. The framework is used in conjunction with cooperative game theory concepts to develop constructs for evaluating the accuracy of competing cost systems. Cooperative game theory provides rational, non-arbitrary criteria for assigning joint benefits and defines two possible constructs: the set of imputations and the core. Using these two constructs to define accuracy, along with an operational measure of product diversity developed in the study, formal conditions are identified where activity-based costing (ABC) is theoretically closer to the true product cost than functional-based costing (FBC). Our results, therefore, provide a theoretical foundation for ABC.