A simulation analysis of interactions between errors in costing system design

Abstract

The academic accounting literature has established that the conditions under which costing systems in general and Activity Based Costing (ABC) in particular provide accurate costs are very stringent. Less is known, however, about the nature, level and bias of costing errors and their interactions, when these conditions are not met. The main problem to overcome to enable us to learn about these is the notion of the unobservable true cost benchmark to which to compare the costing system approximation. This paper presents a simulation method to deal with this problem, allowing a variety of research questions in this research area to be addressed with more generalizable answers. Using our methodology, we test a variety of hypotheses on the interaction between various errors in costing system design that were developed in the previous analytical, empirical, and practitioner literature. We also provide some interesting new insights on interactions between errors that were previously not discussed in the literature. This paper presents new results on (1) conditions under which partial refinement in costing systems does or does not work to improve overall accuracy, (2) the contexts in which it is most effective to correct a particular type of error in terms of improving overall accuracy and (3) indicators of robustness or sensitivity of costing system designs to errors. In doing so, we also provide insights relevant to practitioners, costing system designers and users of costing information alike. Keywords: costing system design, costing accuracy, simulation, costing errors