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A simulation analysis of interactions among errors in costing system design

Labro, Eva and Vanhoucke, Mario (2007) A simulation analysis of interactions among errors in costing system design. Accounting Review, 82 (4). pp. 939-962. ISSN 0001-4826

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Identification Number: 10.2308/accr.2007.82.4.939


Activity-based costing (ABC) as well as other cost accounting systems provide accurate costs only under stringent conditions. However, we know little about the nature, level, and bias of costing errors. This paper reports the results of a simulation study of a two-stage costing system that provides the following main insights: 1) partial improvement in the costing system usually increases the overall accuracy of reported product costs except in certain cases identified in this paper where errors have an offsetting effect, most notably when there is aggregation error on the activity cost pools and measurement error on the resource drivers; 2) the impact of Stage II costing errors on overall accuracy is stronger than that of Stage I errors, so any system refinements should focus on Stage II; and 3) the introduction of aggregation and measurement errors usually results in relatively more products being under- than overcosted, with high amounts of overcosting for a few "big-ticket" (large dollar size) products, and small amounts of undercosting for a larger number of less expensive (small dollar size) products.

Item Type: Article
Official URL:
Additional Information: © 2007 American Accounting Association
Divisions: Management
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Date Deposited: 18 Jul 2008 13:57
Last Modified: 16 May 2024 00:34

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