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Obtaining Informationally Consistent Decisions When Computing Costs with Limited Information

Production and Operations Management, Forthcoming

41 Pages Posted: 23 Aug 2016  

Vic Anand

University of Illinois at Urbana-Champaign

Ramji Balakrishnan

University of Iowa - Department of Accounting

Eva Labro

University of North Carolina Kenan-Flagler Business School

Date Written: August 18, 2016

Abstract

We demonstrate the need to view in a dynamic context any decision based on limited information. We focus on the use of product costs in selecting the product portfolio. We show how ex post data regarding the actual costs from implementing the decision leads to updating of product cost estimates and potentially trigger a revision of the initial decision. We model this updating process as a discrete dynamical system (DDS). We define a decision as informationally consistent if it is a fixed-point solution to the DDS. We employ numerical analysis to characterize the existence and properties of such solutions. We find that fixed points are rare, but that simple heuristics find them often and quickly. We demonstrate the usefulness and robustness of our methodology by examining the interaction of limited information with multiple decision rules (heuristics) and problem features (size of product portfolio, profitability of product markets). We discuss implications for research on cost systems.

Keywords: Costing Systems, Numerical Experiment, Cost Accounting, Heuristics, Dynamical Systems

JEL Classification: M41, M11, D24, C63, C62

Suggested Citation

Anand, Vic and Balakrishnan, Ramji and Labro, Eva, Obtaining Informationally Consistent Decisions When Computing Costs with Limited Information (August 18, 2016). Production and Operations Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2827089 or http://dx.doi.org/10.2139/ssrn.2827089

Vikrant Anand (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Ramji Balakrishnan

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0958 (Phone)
319-335-1956 (Fax)

Eva Labro

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
(919) 962-5747 (Phone)

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