International Journal of Production Research, Vol. 46, No. 4, 15 February 2008, 1047–1069 Activity-based costing in flexible manufacturing systems with a case study in a forging industry K. REZAIEy, B. OSTADI*z and S. A. TORABIy yDepartment of Industrial Engineeing, Faculty of Engineering, University of Tehran, PO Box 11365/4563, Tehran, Iran zDepartment of Industrial Engineering, Faculty of Engineering, Tarbiat Modares University, Tehran, Iran (Revision received August 2006) The objective of this paper is to apply the activity-based costing (ABC) approach together with traditional costing (TC) for parts costing in flexible manufacturing systems (FMS) with the A(2) level of automation. We propose a new model for the implementation of ABC using the product cost tree concept. First, the required resources and activities for each part are recorded, and then their costs are calculated using the appropriate cost formulae. This model was applied in a forging industry. A comparison and analysis between ABC and TC was then carried out based on the computational results obtained from the case study. The results indicate that the ABC outputs are more reliable than the TC outputs, and thus the ABC approach is a more acceptable tool for parts costing in FMS. Keywords: Costing; Activity-based costing; Cost management; Flexible manu- facturing; Product cost tree concept 1. Introduction Increasing worldwide competition has forced manufacturing organizations to seek to produce high-quality products more quickly and at a competitive cost. In order to reach these goals, manufacturing organizations have been required to become more flexible, integrated and highly automated. However, since initial and operating costs are high, advanced manufacturing system users are concerned with achieving high system utilization. Despite the advantages of having high levels of automation, flexibility, and high-quality products, without a realistic and more accurate costing mechanism these systems cannot be expected to remain competitive (Ozbayrak et al. 2004). Taking into account the growing concern of manufacturing industry with respect to competition in a global market, a number of initiatives are now underway to improve the competitive position of firms, one of which is the implementation of activity-based costing (ABC) in the manufacturing sector. The development and promotion of ABC have been stimulated and largely influenced by the work of Cooper and Kaplan (1988a). Despite the continuing debate on its originality as well as its *Corresponding author. Email: bostadi@engmail.ut.ac.ir International Journal of Production Research ISSN 0020–7543 print/ISSN 1366–588X online ß 2008 Taylor & Francis http://www.tandf.co.uk/journals DOI: 10.1080/00207540600988121