Adverse Effects of Confidence in Complex Cost Systems amid Competition

Posted: 16 Aug 2016 Last revised: 15 Nov 2019

See all articles by Ella Mae Matsumura

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

Tyler F. Thomas

University of Wisconsin - Madison

Dimitri Yatsenko

University of Wisconsin-Whitewater

Date Written: November 9, 2018

Abstract

Prior literature suggests that organizations desire more accurate cost systems in response to greater competition. Complex cost systems have the potential to be more accurate than simpler systems, but are still susceptible to material errors. Overreliance on cost information provided by a complex cost system could lead to complacency, due to managers’ confidence that the cost information is without material errors. Our study experimentally evaluates how cost system complexity and competition affect managers’ judgments and inhibit recognition of impactful cost errors. We find that greater cost system complexity inspires greater confidence in the cost system, reducing the likelihood that managers will recognize material cost errors. We also find that high competition inhibits managers’ recognition of material cost system errors, and that with both cost system complexity and high competition, managers are potentially the least likely to recognize material cost system inaccuracies. These findings show that although greater complexity garners increased manager confidence, this confidence can lead to adverse effects to the firm as impactful cost errors go undiscovered.

Keywords: Cost system, complexity, competition, confidence, attribution

Suggested Citation

Matsumura, Ella Mae and Thomas, Tyler F. and Yatsenko, Dimitri, Adverse Effects of Confidence in Complex Cost Systems amid Competition (November 9, 2018). Available at SSRN: https://ssrn.com/abstract=2824076 or http://dx.doi.org/10.2139/ssrn.2824076

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-9731 (Phone)
608-265-6040 (Fax)

Tyler F. Thomas

University of Wisconsin - Madison ( email )

Wisconsin School of Business
975 University Avenue
Madison, WI 53706
United States

Dimitri Yatsenko (Contact Author)

University of Wisconsin-Whitewater ( email )

Accounting Dept - HH 3301
Whitewater, WI 53190
United States
2624721344 (Phone)

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