An ABC Simulation Focusing on Incentives and Innovation

Current textbooks advocate activity‐based costing (ABC) because it provides more detailed information on resource usage, leading to better cost control and reengineering of production processes. However, there is often little attention paid to how other organizational control features can affect the use of the information provided by ABC systems. This active learning simulation demonstrates that incentives can have a significant impact on how workers use ABC information to manage costs and innovate a production process. The simulation involves two student teams that are furnished with identical ABC cost driver information and either a tournament‐ or group‐based incentive structure. The teams simulate a factory environment by creating products using a simple manufacturing process, while the remaining students observe the process and record differences in communication, innovative activity, and resulting profitability. The teams' outcomes under the two separate incentives illustrate the interaction of a fir...