Watch Out for Hidden Noise: Determinants and Consequences of Random Noise in Cost Information
57 Pages Posted: 18 Aug 2018 Last revised: 20 Aug 2021
Date Written: August 19, 2021
Random noise in costing systems is the particular variability of reported product costs due to random measurement errors. We investigate the presence and determinants of random noise in cost information and the consequences thereof when managers update their beliefs by using this information. Using a numerical experiment, we document that random noise persistently affects product costs. A cost pool disaggregation initially reduces but later fails to eliminate random noise, where it specifically besets less expensive products. We find that random measurement errors spill over via cost allocation bases to previously unaffected products and create additional random noise. In a cost-control setting, we furthermore find that random noise hinders the investigation of variances and observe that more information is required to identify positive compared to negative cost variances. Collectively, our findings suggest that random noise may be a hidden problem for organizations and that it is more detrimental than previously thought.
Keywords: Random Measurement Errors; Random Noise; Noise; Costing; Cost Accounting; Performance Measure; Judgments.
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