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

See all articles by Kai G. Mertens

Kai G. Mertens

Hamburg University of Technology

Matthias Meyer

Technical University Hamburg-Harburg (TUHH)

Date Written: August 19, 2021

Abstract

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.

Suggested Citation

Mertens, Kai G. and Meyer, Matthias, Watch Out for Hidden Noise: Determinants and Consequences of Random Noise in Cost Information (August 19, 2021). Available at SSRN: https://ssrn.com/abstract=3233882 or http://dx.doi.org/10.2139/ssrn.3233882

Kai G. Mertens (Contact Author)

Hamburg University of Technology ( email )

Schwarzenbergstrasse 95
Hamburg, DE Hamburg 21073
Germany

Matthias Meyer

Technical University Hamburg-Harburg (TUHH) ( email )

Schwarzenbergstrasse 95
Hamburg, DE Hamburg 21073
Germany

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