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Diversity in resource consumption patterns and costing system robustness to errors

By Eva Labro and Mario Vanhoucke

Abstract

Practitioners and academics hypothesize that when there is high diversity in resource consumption patterns, costing systems are more sensitive to errors. Given that firms' resources to enhance costing accuracy are typically constrained, it is argued that costing system refinement efforts should be focused on such cases, where they are likely to be most effective. However, little guidance is available on how to identify those situations where costing system refinement efforts (such as introducing an activity-based costing system) are likely to pay off most in terms of increased accuracy. Further, to our knowledge, the existing guidance provided by this high diversity rule of thumb has never been empirically tested. Using a simulation method, we address these issues in this paper. Specifically, we model various aspects, and degrees, of diversity in the resource consumption patterns to be reflected by the costing system and find that more diversity in resource consumption patterns only leads to increased costing system sensitivity to errors for some of the aspects of diversity studied. We also identify situations in which allocating costing system refinement resources to cases characterized by high diversity in resource consumption patterns is detrimental to improved accuracy

Topics: HD28 Management. Industrial Management
Publisher: Institute for Operations Research and Management Sciences
Year: 2008
DOI identifier: 10.1287/mnsc.1080.0885
OAI identifier: oai:eprints.lse.ac.uk:21204
Provided by: LSE Research Online
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