Strategic investment analysis using activity based costing concepts and analytical hierarchy process techniques

Abstract

An increasing number of organizations are using Activity Based Costing (ABC) to gain insight into manufacturing activities and processes as well as product costing. The natural logic of ABC can also be applied to strategic decisions. This paper presents a methodology that ties investment decisions to ABC concepts using the Analytical Hierarchy Process (AHP). By using AHP, both monetary and non-monetary benefits can be included in the analysis. First, the relationships between goals, activities, cost, and performance measures are developed, then they are combined to make two models: a cost impact model and a performance impact model. The final selection is made using a cost vs performance graph. The goal of the decision process is to evaluate investment alternatives based on their impact on activities and their contribution to organizational goals.