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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. The Accounting Review, 82 (4). pp. 939-962. ISSN 0001-4826

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Abstract

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: http://www.atypon-link.com/AAA/loi/accr
Additional Information: © 2007 American Accounting Association
Library of Congress subject classification: H Social Sciences > HF Commerce > HF5601 Accounting
Sets: Research centres and groups > Managerial Economics and Strategy Group
Departments > Management
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 18 Jul 2008 13:57
URL: http://eprints.lse.ac.uk/16660/

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