A Framework for Measuring the Complexity of Cost Systems

Abstract

Firms routinely employ product costs in decision making. The question of how to design a cost system that is well-suited for this purpose has received considerable practitioner and academic interest. The design or, equivalently the required complexity, of cost systems has been hotly debated over the last several decades. Prior research has attempted to identify situations when different levels of cost system complexity (CSC) are most beneficial for improved decision making and profitability. Although cost system design includes many attributes and assumptions, previous studies have generally measured CSC based solely on how indirect costs are assigned to products. In this study, we propose and validate a comprehensive measure of CSC based on a framework consisting of nine different continuums of cost system design: (1) which costs are included in product cost, (2) level of tracking direct costs, (3) level of tracking indirect costs, (4) type of cost drivers used to allocate indirect costs, (5) use of standard costing, (6) ability to disaggregate fixed and variable costs, (7) measurement of unused capacity costs, (8) level of variance analysis, and (9) usage of replacement costs for depreciation.

Using data collected from a cross-section of German-speaking firms and PLS-based structural equation modeling, we find strong evidence that contextual and organizational factors which can be expected to encourage complex costing systems are more strongly related to the framework-based CSC metric than to simpler measures of complexity. This expanded framework will facilitate consistent measurement and comparison of different costing approaches, enable richer studies of appropriate CSC for different situations, and provide practical guidance to designers and users of costing systems to achieve the optimal level of costing accuracy.

Keywords: Cost accounting, cost system complexity, survey, product costing