Flexible Budgeting and Variance Analysis in an Activity-Based Costing Environment.

This article focuses on how Activity-Based Costing (ABC) affects traditional flexible budgeting and variance analysis. The deficiencies of traditional costing methods, the structure of ABC systems, and other key conceptual and implementation issues underlying ABC have been widely discussed in the literature. The existing ABC literature has emphasized the difference in assignment of overhead under ABC and traditional costing for product costing purposes, and that product costs calculated under ABC provide a better basis for making pricing decisions. Articles and textbooks which make specific recommendations on cost control under ABC have adopted different views of how or whether flexible budgeting and variance analysis should be used. Examination of a large number of new and revised editions of basic cost and management accounting textbooks found that many include a limited discussion of ABC in the context of overhead allocations for product costing purposes.