Evaluating Heuristics Used When Designing Product Costing Systems
The academic and practitioner literature justifies firms' use of product costs in product pricing and capacity planning decisions as heuristics to address an otherwise intractable problem. However, product costs are the output of a cost reporting system, which itself is the outcome of heuristic design choices. In particular, because of informational limitations, when designing cost systems firms use simple rules of thumb to group resources into cost pools and to select drivers used to allocate the pooled costs to products. Using simulations, we examine how popular choices in costing system design influence the error in reported costs. Taking information needs into account, we offer alternative ways to translate the vague guidance in the literature to implementable methods. Specifically, we compare size-based rules for forming cost pools with more informationally demanding correlation-based rules and develop a blended method that performs well in terms of accuracy. In addition, our analysis suggests that significant gains can be made from using a composite driver rather than selecting a driver based on the consumption pattern for the largest resource only, especially when combined with correlation-based rules to group resources. We vary properties of the underlying cost structure (such as the skewness in resource costs, the traceability of resources to products, the sharing of resources across products, and the variance in resource consumption patterns) to address the generalizability of our findings and to show when different heuristics might be preferred. This paper was accepted by Stefan Reichelstein, accounting.
Volume (Year): 57 (2011)
Issue (Month): 3 (March)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Marshall Fisher & Kamalini Ramdas & Karl Ulrich, 1999. "Component Sharing in the Management of Product Variety: A Study of Automotive Braking Systems," Management Science, INFORMS, vol. 45(3), pages 297-315, March.
- E. Labro & M. Vanhoucke, 2005. "A simulation analysis of interactions between errors in costing system design," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/333, Ghent University, Faculty of Economics and Business Administration.
- Jayashankar M. Swaminathan & Sridhar R. Tayur, 1998. "Managing Broader Product Lines through Delayed Differentiation Using Vanilla Boxes," Management Science, INFORMS, vol. 44(12-Part-2), pages S161-S172, December.
- Eva Labro & Mario Vanhoucke, 2008. "Diversity in Resource Consumption Patterns and Robustness of Costing Systems to Errors," Management Science, INFORMS, vol. 54(10), pages 1715-1730, October.
- Verrecchia, Robert E., 1990. "Information quality and discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 12(4), pages 365-380, March.
- Langberg, Nisan & Sivaramakrishnan, K., 2008. "Voluntary disclosures and information production by analysts," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 78-100, September.
- Foster, George & Gupta, Mahendra, 1990. "Manufacturing overhead cost driver analysis," Journal of Accounting and Economics, Elsevier, vol. 12(1-3), pages 309-337, January.
- Jordan, J S, 1989. "The Economics of Accounting Information Systems," American Economic Review, American Economic Association, vol. 79(2), pages 140-45, May.
- Xavier Vives, 1990. "Trade Association Disclosure Rules, Incentives to Share Information, and Welfare," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 409-430, Autumn.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:57:y:2011:i:3:p:520-541. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.