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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.

We explore the theoretical relation between earnings and market returns as well as the properties of earnings frequency distributions under the assumption that managers use unbiased accounting information to sequentially decide on real options their firms have and report generated earnings truthfully, with the market pricing the firm based on those reported earnings. We generate benchmarks against which empirically observed earnings-returns relations and aggregate earnings distributions can be evaluated. This parsimonious model shows a coherent set of results: reported losses are less persistent than reported gains, decision making diminishes the S-shaped market response to earnings and earnings relate to returns asymmetrically in the way documented by Basu [1997]. Furthermore, the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily single-peaked. Instead, it may exhibit a kink at zero and look similar to the plots reported by Burgstahler and Dichev [1997]. However, within our model, none of these phenomena are due to reporting noise, bias, or some undesirable strategic managerial behavior. They are the natural consequences of using past earnings as the basis for value increasing managerial decision making that in turn generates the future earnings on which future decisions will be based.

This paper provides evidence on the determinants and economic outcomes of updates of accounting systems (AS) over a 24-year timespan in a large sample of U.S. hospitals. We provide evidence that hospitals update their AS in response to three types of pressures: economic pressures , such as increases in the quality of accounting information driven by vendor rollouts of improved AS; coercive pressures imposed by regulators mandating certain practices, such as internal control practices imposed by Sarbanes–Oxley Section 404; and mimetic pressures for hospitals to conform their AS to those of their peers, such as local county and prominent “celebrity” peers. We find that only economically driven updates lead to economic benefits in the form of lower operating expenses and higher revenues. In contrast, we find some evidence that AS updates prompted by coercive regulatory pressures actually impose economic costs in the form of higher operating expenses. This paper was accepted by Suraj Srinivasan, accounting .

We develop a theoretical model of the firm that links properties (stewardship vs. valuation focus) of financial reporting regimes with the informational properties of optimal managerial accounting systems. We show that, contrary to the standard textbook proposition, properties of management and financial accounting systems are not independent. Significantly, we provide an explicit connection between exogenous and observable properties of a firm's financial reporting system and the quality of the managerial accounting system on which manager(s) base real economic decisions. As the quality of those economic decisions can also be inferred from publicly available data, our theory generates new opportunities for empirical managerial accounting research on large nonproprietary samples. Further, by being able to identify enhanced performance due to improved managerial accounting information, our theory provides opportunities to gain a better understanding of the link between particular managerial accounting practices and the quality of the information produced.

The use of simulation methods is not very common in accounting research, even though several authors have pointed to the advantages these methods offer in addressing accounting research questions. In this position paper, I discuss the difficulties encountered when applying simulation methods in accounting research. These roadblocks are the problem of seeing the forest for the trees, the difficulty in designing the model and assessing which variables to include, issues with calibrating simulation models with relevant parameter values to guarantee external validity, and the unfamiliarity of the accounting readership with simulation methods. For each of these obstacles, I give some practical advice on how to overcome them from my experience as an author as well as a reviewer.

In this paper I review the component commonality literature through a management-accounting lens, focusing on the cost effects of an increase in the use of the same version of a component across multiple products. The bulk of this literature is of a theoretical nature, for example, analytical models, programming models, or conjectures based on casual observations of practice. Some of this literature purports, especially in introductions to the topic, that cost generally decreases with increasing commonality. However, based on a review of the theoretical literature using an activity-based costing framework and distinguishing between cost-driver and cost-rate effects, I conclude that the cost picture is more subtle. In other words, it is too early to make any general statement about the effect of increasing commonality on total costs. Moving to the limited empirical literature on the topic, consisting of case studies (sometimes combined with simulation) and empirical research on larger data sets, the conclusion that there is even more room for future research becomes evident.

Although employees' time estimates are used extensively for costing purposes, they are prone to measurement error. In an experimental setting, we research how measurement error in time estimates varies with: (1) the level of aggregation in the definition of costing system activities (aggregated or disaggregated); (2) task coherence (the extent to which the activities that require time estimates present themselves coherently or incoherently); and (3) when notice is given that time estimates will be required (in advance or after the fact), that is, whether participants know that time estimates will be required before they perform the activities. We also test on response mode (estimates in percentages or absolute time units). The results suggest an important trade-off between the level of aggregation and measurement error: increasing aggregation in the definition of activities leads to lower measurement error. Also, advance notification reduces measurement error, especially in settings with aggregated activities or incoherent tasks. Finally, we find a strong overestimation bias when participants provide time estimates in minutes, which may be problematic for Time-Driven Activity-Based Costing that advocates the use of estimates in minutes. These results are relevant to accountants and decision makers who want to assess and control the measurement error in their costing system and to professionals in related areas that make use of time estimates (e.g., billing, tendering).

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 two-stage cost allocation systems that provide the following main insights: (1) partial improvement in the costing system usually increases the overall accuracy of reported product costs except in specific cases identified in this paper where errors have an offsetting effect, most notably when there is aggregation error in the activity cost pools and measurement error in the resource drivers; (2) the impact of Stage II costing errors on overall accuracy is stronger than that of Stage I errors, so system refinements should focus on Stage II; and (3) the presence of aggregation and measurement errors usually results in relatively more products being under- than over-costed, with large amounts of over-costing for a few \"big-ticket\" (in dollar terms) products, and small amounts of under-costing for a larger number of less expensive products.

The academic and practitioner literature justifies firms' use of product costs in product pricing and capacity planning decisions as heuristics to address an otherwise intractable problem. However, product costs are the output of a cost reporting system, which itself is the outcome of heuristic design choices. In particular, because of informational limitations, when designing cost systems firms use simple rules of thumb to group resources into cost pools and to select drivers used to allocate the pooled costs to products. Using simulations, we examine how popular choices in costing system design influence the error in reported costs. Taking information needs into account, we offer alternative ways to translate the vague guidance in the literature to implementable methods. Specifically, we compare size-based rules for forming cost pools with more informationally demanding correlation-based rules and develop a blended method that performs well in terms of accuracy. In addition, our analysis suggests that significant gains can be made from using a composite driver rather than selecting a driver based on the consumption pattern for the largest resource only, especially when combined with correlation-based rules to group resources. We vary properties of the underlying cost structure (such as the skewness in resource costs, the traceability of resources to products, the sharing of resources across products, and the variance in resource consumption patterns) to address the generalizability of our findings and to show when different heuristics might be preferred. This paper was accepted by Stefan Reichelstein, accounting.

Purpose - Supplier involvement in cost reduction efforts has been concentrated mainly in the product development phase of the life cycle of the product. Often this concentration on the early phases of the product life cycle is defended with referral to the 80 20 rule that says that 80 per cent of the manufacturing costs are determined or committed during product design and development. The purpose of this paper is to look for empirical evidence that supports this rule and discuss the limited literature on joint buyer supplier cost reduction programmes beyond the product development stage of the product life cycle.Design methodology approach - An extensive literature survey on both the cost commitment rule and collaborative cost reduction programmes beyond the product development stage was conducted.Findings - It was found that empirical evidence in the literature for the 80 20 rule on cost commitment in product design is only anecdotal. Even more surprisingly, compared to the literature on cost reduction in design phases, the literature on cost reduction efforts in later stages of the product life cycle is rather limited and usually ignores possibilities for supplier buyer collaboration.Research limitations implications - Further empirical research (suggestions provided) should assess whether the identified lack of evidence is due to a gap in the empirical literature or to lower degrees of cost commitment and attention to cost efforts beyond product design indeed existing in practice.Practical implications - This paper calls practitioners to revisit the cost commitment rule and check its existence in their specific contexts. As a result of this exercise, practitioners may want to consider implementing some of the techniques reviewed in the paper that can assist in collaborative cost reduction beyond the product development stage.Originality value - Given the amount of money involved, the general applicability of the cost reduction techniques to various industries and relationships with suppliers, the opportunities for huge savings and the fact that most firms usually have many products and or technologies at maturity stage, my research makes an important contribution by identifying both a lack of empirical evidence in the literature on the notion that 80 per cent of the costs are committed in the design phase and the limited attention given in the literature to supplier buyer cost reduction programmes in further stages of the product life cycle.