The Use of System Dynamics as a Cost Management Tool

In today’s business world whose characteristics include limited financial resources it is critical to identify and monitor where and how these resources need to be invested in the company. The Master Budget represents a plan of action which specifies how financial resources will be acquired and invested during a particular time period. Activity-Based Budgeting (ABB) is a budgeting approach that integrates ActivityBased Costing (ABC) into the budgeting process. ABB’s approach forecasts the products to be produced and the customers to be served in order to determine the activities, which will be required, and therefore, identify the required resources. ABB leads to a better control of the firm’s indirect costs. Systems Dynamics represents a simulation approach with the ability to provide decisions based on the feedback that it receives from the process. SD analyzes the system status changes that correspond to the system variables’ changes and/or the interactions amongst them. This research presents an innovative preliminary application of System Dynamics as a Cost Management model based on the detailed cost information provided by ABC. The model can analyze and foresee the effect of each decision or policy implemented on the firm’s budget and financial performance.