Assessing the Costs and Benefits of Investing in Cost System Accuracy

Date01 November 2013
Published date01 November 2013
AuthorNathan V. Stuart
© 2013 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.21909
Nathan V. Stuart
This article presents a flowchart to help managers
determine whether the benefits of implement-
ing a multiple-cost-driver system to improve the
accuracy of reported unit costs will outweigh the
implementation costs. The flowchart disciplines
decision makers to consider whether the firm pro-
duces multiple products, whether those products
consume indirect resources in heterogeneous pat-
terns, and whether the firm’s competitive position
truly depends on more accurately reported cost
information. Careful use of this tool will increase
the likelihood that investments in cost system
accuracy will have positive net present values.
© 2013 Wiley Periodicals, Inc.
Assessing the Costs and Benefits of
Investing in Cost System Accuracy
There is a recent
and renewed inter-
est in promoting
activity-based cost sys-
tems as the right choice
for most organizations
(White et al., 2011). It’s
appropriate, therefore,
to recall that cost sys-
tems are investments
just like any other, and
that the costs and ben-
efits of more complex
cost systems differ from
one organization to the
This article dis-
cusses the investment
choice in cost system accuracy
in clear cost-benefit terms.
While investing in accuracy so
that the marginal benefits of
additional accuracy equal the
marginal costs is nothing new
(Cooper, 1989; Turney, 2010),
this article introduces a flow-
chart that managers can use
to guide investment decisions
about improved cost systems in
a careful and systematic fash-
ion. Using this tool can help
ensure that investments in cost
systems such as activity-based
costing (and its more recent
offspring, time-driven activity-
based costing) create value for
the firm.
I begin by discussing the
purpose of developing unit cost
information. I next place the
investment choice in a microeco-
nomic equilibrium framework
and review the reasons why
the optimal level of accuracy
when the cost system was first
installed is unlikely to be the
optimal level of accuracy in
the future. Finally, I discuss the
ways companies can adapt cost
systems to improve the accu-
racy of reported unit costs, and
introduce the flowchart tool for
deciding whether the
benefits of invest-
ing in a multiple-
cost-driver system
(MCDS), such as
activity-based cost-
ing, outweigh the
Unit cost is the
estimate of the cost
of one (logically
appropriate) unit of
a product or service
and plays many important roles
in managerial decision making.
Companies can, for example, set
selling prices based on the unit
costs (e.g., a 20% markup), or
decide to exit a market because
the unit costs for their products
are greater than the price they
can obtain in the market. In
a health care setting, govern-
ment reimbursement rates can
depend, at least in part, on the
unit costs of particular treat-
ments or procedures. It is impor-
tant, therefore, to understand
(a) how organizations prepare
unit-cost information, and (b)

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