Traditional cost accounting methods originated in the conditions when business entities could easily and directly allocate costs of direct labor and material, where the allocation of overhead expenses did not significantly affect the final outcome of the product unit cost calculation. However, the development of society, production automatization and globalization have influenced the development of services, and thus the service sector. Due to the above, business entities in the manufacturing sector encountered an increase of overhead cost in total costs, whilst these overhead costs, due to the nature of business of the entities in the service sector, accounted from the very beginning for most of the total costs. The allocation of overhead costs thus began to pose a serious problem to business entities in the manufacturing and service sectors because overhead costs could not be directly linked to the product or service, and because of their share in total costs, misallocation indicated a distorted picture of the unit cost of the product or service. Information on the unit cost of a product or service is one of the most important information in the decision-making process, so in response to an increase in the share of overhead costs and the need for more objective and precise allocation of overhead costs, various modern costing methods have appeared. The ABC method is one of the best-known modern costing methods that appeared in the 1980s and has so far experienced various stages of development. The TDABC method, which is a modern version of the ABC method, was supposed to eliminate the key shortcomings of the ABC method and thus enable the management of the business entity easy implementation and precise allocation of overhead costs. Although these methods were originally developed for entities in the manufacturing sector, it was soon realized that the benefits of their application are greater for business entities in the service sector. According to the above, the subject of the research in this paper is the application of the ABC or TDABC method in large and medium-sized business entities from the service sector of the Republic of Croatia, while the research problem of this paper is the analysis of the impact of the ABC/TDABC method on cost allocation and cost reduction for the purpose of increasing profits and thus increasing return on equity coefficent of the business entity. On the basis of the defined subject and research problem, four basic research questions were asked, namely: 1. to what extent the TDABC method or some variant of the ABC method is applied in large and medium-sized business entities in the service sector of the Republic of Croatia; 2. for what reasons business entities do not apply the TDABC method and what limitations are attributed to its application; 3. do ABC/TDABC methods enable more objective allocation of costs to cost bearers (product or service provided) and more reliable information on cost bearers, as well as cost rationalization, from the management perspective and for business decision-making purposes; and 4. do business entities from the service sector of the Republic of Croatia that apply the TDABC method or some variant of the ABC method achieve on average higher return on equity if compared to business entities that do not apply this method. In accordance with the research questions of this paper, hypotheses were set: 1. H1: A relatively small share (less than 20%) of large and medium-sized business entities from the service sector of the Republic of Croatia use the ABC or TDABC method. 2. H2: The key limitations of implementing the TDABC method among large and medium-sized business entities from the service sector of the Republic of Croatia are unfamiliarity with the method and expected high implementation costs. 3. H3: The application of the ABC or TDABC method according to management contributes to a more objective allocation of costs to services by generating more reliable information about the costs of each individual service at large and medium-sized business entities from the service sector of the Republic of Croatia. 4. H4: Large and medium-sized business entities from the service sector of the Republic of Croatia that uses the ABC or TDABC method achieve, on average, higher rates of return on equity than those business entities that do not use those methods. In order to meet the subject of this paper, it was first necessary to systematize the results of research conducted so far and, based on the analysis of secondary sources, explain the key characteristics and structure of the service sector in relation to the manufacturing sector. Also, it was necessary to explain the decision-making process, its importance and dependence on accounting methods of cost calculation in order to better understand the importance of modern cost calculation methods in modern business, especially in the service sector of the Republic of Croatia. Modern methods allocate indirect costs in a more refined way, which to a very large extent make up the total costs of service business entities, which is why their application in the service sector is of great importance in order to obtain the correct cost price of the single service provided. For this reason, the ABC and TDABC methods have been defined in detail, their advantages and disadvantages compared to traditional methods, as well as the advantages and disadvantages of the TDABC method in comparison with the ABC method. The conducted empirical study, in which 110 out of 326 large and medium-sized business entities from the service sector participated, determined that 25.45% of them use the ABC method, and 15.45% of them use the TDABC method, or if we put them together, these methods are used by 40.91% of business entities. The expected first place was taken by the traditional method with 51.82%, while the ABC and TDABC methods unexpectedly took the second and third places, thus disproving the hypothesis (H1), which was also confirmed by applying the chi-square test, since the difference between the expected and obtained frequency related to the application of the mentioned methods are statistically significant. Furthermore, twice as many respondents estimated that "It is not likely" (42, i.e. 65.63%) that they will implement mentioned methods in the foreseeable future than those who consider it "Possible" or even "Probable" (22, i.e. 34.38 %). The mentioned differences proved to be statistically significant, with the answer "Possible" given by only 2 participants, or 3.13%, which indicates a trend that the achieved share of the mentioned 40.91% of business entities that use the ABC/TDABC method will not increase in near future. Given that the TDABC method is a relatively new method that still contains certain inherent disadvantages of the ABC method, the expected limitations were unfamiliarity with the method and expected high implementation costs. However, the research participants stated the most important reasons and limitations for not applying the TDABC method: TDABC method requires the education of all involved employees; TDABC method requires constant updating and control, which requires additional engagement of all involved employees; TDABC method is more useful in the manufacturing than in the service sector and TDABC requires reorganization of business processes which may cause resistance from employees. Following the above results, hypothesis (H2) was rejected. Given the application of a five-point Lickert scale for a series of propositions (reasons and limitations), arithmetic means, standard deviations, minimum and maximum scores were used to rank the propositions. Furthermore, the analysis of the answers points to the fact that business entities that are more familiar with the ABC or TDABC method, based on their direct experience, estimate that the limitations related to the application of the TDABC method are smaller, than is the case with business entities that do not have direct experience with the ABC or TDABC method and express more negative attitudes. The third research question of this paper, if the ABC/TDABC method enables a more objective allocation of costs to cost bearers and more reliable information on cost bearers, as well as cost rationalization, all research participants were also asked for their subjective opinion. Based on the claims offered, the users of the ABC and TDABC methods rated the statement "objectively allocates costs by generating reliable information about the cost of each individual service" the best, with which hypothesis (H3) is confirmed. It is indicative that, on each of the eight propositions offered, evaluating each method, the respondents gave the best marks to the ABC and TDABC method, while the other methods were systematically rated lower. In addition to the above, users of the ABC and TDABC method for the claim "increases the profitability of capital by rationalizing costs in the entire business" gave higher ratings than the same rating for the other methods, and this difference proved to be statistically significant. Given that Likert rating scale was used for the claims, arithmetic means, standard deviations, minimum and maximum values were used. A two-way univariate analysis of variance (ANOVA) was used to examine whether the evaluations of accounting methods differ statistically significantly with regard to the methods used. To test the statistical significance of the differences in the views on the objectivity of the allocation of costs to services, and considering whether the business entity applies the ABC or TDABC method, a t-test was applied. The last research question investigated whether business entities from the service sector of the Republic of Croatia that apply the TDABC method or a variant of the ABC method achieve an average higher return on equity compared to business entities that do not use this method. Using secondary data for all business entities that participated in the research, 110 of them, the average return on equity (ROE) values ​​for a five-year period were calculated. Although the average ROE values ​​were most favorable to the ABC method (ROE = 15%), followed by the TDABC method (ROE = 12%) and the least to the other cost accounting methods (ROE = 11%), the analysis of variance (ANOVA) for repeated measurements did not show a statistically significant difference between the displayed values, with which the hypothesis (H4) is rejected. Although this paper did not confirm the connection between used cost accounting method and objective indicators of ROE, the fact is that in the level of attitudes, it was proven that the respondents believe that the ABC and TDABC methods increase ROE by rationalizing costs in the entire business, to a significantly greater extent than it is the case with other methods. The research has shown that the ABC and TDABC methods are applied to a greater extent than expected, and that unfamiliarity with TDABC method as well as the expected high costs are not reasons for its non-application. This paper has not proved the direct connection between the use of ABC/TDABC method and ROE ratio, but it has been found that users of these methods believe that they better allocate costs to cost bearers compared to other methods and thus increase ROE through cost rationalization.