Using simulation to benchmark traditional vs. activity-based costing in product mix decisions

Activity-based costing is being promoted as the most effective method available for predicting costs associated with a variety of business decisions. This paper demonstrates its effectiveness in benchmark tests of activity-based costing versus traditional direct labor based costing in product mix decisions using a simulation model. The simulation model itself is of a simple and fictitious manufacturing system, although its design incorporates characteristics that the authors have seen in real manufacturing systems.