Adverse Effects of Confidence in Complex Cost Systems amid Competition
Posted: 16 Aug 2016 Last revised: 15 Nov 2019
Date Written: November 9, 2018
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
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