Diversity in Resource Consumption Patterns and Costing System Robustness to Errors
Labro, Eva
Labro, Eva
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2006
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Abstract
When decisions are made on the basis of reported product cost, even modest distortions in product cost may create significant distortions in decision-making. But costing systems are unlikely to be error-free. On the other hand, firms' budgets to enhance costing accuracy are typically constrained, and should be used where they are most effective. There is little guidance available, however, on how to (1) assess costing system quality, (2) improve costing system robustness to unwanted errors and (3) identify situations where costing system refinement efforts (such as introducing an ABC system intended to better reflect causal relationships) are likely to pay off most in terms of increased accuracy. Using a simulation method, this paper addresses these issues. Academic and practitioner literature hypothesize that more diversity in resource consumption patterns may lead to increased costing system sensitivity to errors. We model various aspects and degrees of diversity in the resource consumption patterns to be reflected by the costing system design and study their impact on costing system robustness to errors, allowing us to provide guidance on assessing and improving costing system robustness. Also, we examine where to best allocate resources for costing system refinements in order to maximize their impact in terms of increased accuracy. Importantly, we identify situations in which following the high diversity rule of thumb and focus such costing system refinement efforts on cases where there is a lot of diversity in resource consumption patterns is detrimental to improved accuracy.
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35 Commerce, Management, Tourism and Services, 3507 Strategy, Management and Organisational Behaviour, Clinical Research