Cost pool

Abstract: SYNOPSIS AND INTRODUCTION: Recent attention has focused on the design of cost systems that improve measurement of product costs. Much of this work has been classified under the general heading of Activity-Based Costing (ABC). There has been little systematic analysis, however, of why an ABC system with multiple cost pools, activity drivers and allocation bases generates more accurate product costs. The intuitive argument rests on the belief that multiple cost pools and multiple activity drivers better reflect the cause and effect relation between overhead resource consumption and products. Our analysis reveals the existence of trade-offs attributable to specification error, aggregation error, errors in measurement of overhead costs and errors in measurement of product-specific units of allocation bases. Our research provides some guidance for implementing ABC systems. There are two principal results of our analysis. First, partially improving specification of cost allocation bases and increasing the number of cost pools in a costing system can actually increase specification and aggregation errors. Second, reductions in specification and aggregation errors from more disaggregated and better specified costing systems may increase measurement errors and hence errors in product costs. We assume that firms do not know actual product costs, but rather implement new cost systems by identifying better cost drivers and increasing the number of cost

Abstract: Most studies on cost-based decision-making examine the profit impact of cost reports that rely on different methods to allocate costs. In practice, firms’ cost reports often employ the same cost allocation method with subtle variations in the way that the cost data are presented. This paper examines experimentally the profit impact of a cost report’s presentation format in relation to a decision maker’s level of cost accounting knowledge. Using a customer profitability report prepared using activity-based costing and presented in either a tabular or a graphical format, participants analyze a complex pricing and resource allocation task that affects firm profitability. The results suggest a strong relation between presentation format and cost accounting knowledge. Specifically, decision makers with a low level of cost accounting knowledge attain higher profits when they use a graphical format in comparison to a tabular format. More surprisingly, graphs (versus tables) have an adverse effect on profits for users with a high level of cost knowledge. This result has broad implications: in order to facilitate the decisions of a variety of users of accounting data (e.g. managers, external investors, etc.), firms may need to adapt the presentation format of their accounting data to the level of accounting sophistication of the users.

Abstract: This paper reports the findings of a postal questionnaire survey that examines the extent to which potential explanatory factors influence the level of complexity of product costing system design choices in UK companies. It is argued that because previous surveys have sought to classify costing systems by two discrete alternatives, either traditional or ABC systems, they do not adequately capture the diversity of practices that exist. The distinguishing feature of this paper is that it adopts a broader perspective and examines cost system design choices that vary along a continuum ranging from very simplistic to highly complex costing systems.