2000: the Merger of Discrete Event Simulation with Activity Based Costing for Cost Estimation in Manufacturing Environments

Activity based costing (ABC) has revolutionized product costing, planning, and forecasting in the last decade. It is based on a philosophy of estimation that: “it is better to be approximately right, than precisely wrong.” The philosophy of discrete-event simulation modeling follows a similar tack, where statistical inference and the stochastic nature of processes are used to replicate the behavior of a physical system. In this work, ABC and discrete-event simulation are linked to provide an improved costing, planning, and forecasting tool. Numerous point cost estimates are generated by the ABC model, using driver values obtained from a discrete-event simulation of the process. The various cost estimates can be used to produce confidence interval estimates of both the physical system and underlying cost structure. Rather than having a single point estimate of a product’s cost, it is now possible to produce the range of costs to be expected as process conditions vary. This improved cost estimate will support more informed operational and strategic decisions.