On the determinants of costing system robustness to errors

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. We model various aspects and degrees of diversity in the resource consumption patterns to be reflected by the costing system and study whether the hypothesis in academic and practitioner literature that more diversity in resource consumption patterns may lead to increased costing system sensitivity to errors holds. Also, we identify situations in which following the high diversity rule of thumb and allocate costing system refinement resources to cases where there is a lot of diversity in resource consumption patterns is detrimental to improved accuracy.