The impact of cost allocation errors on price and product-mix decisions

C. Homburg (), Julia Nasev () and Philipp Plank ()
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C. Homburg: University of Cologne
Julia Nasev: University of Cologne
Philipp Plank: University of Cologne

Review of Quantitative Finance and Accounting, 2018, vol. 51, issue 2, No 8, 497-527

Abstract: Abstract We use simulations to examine the impact of cost allocation errors on pricing and product-mix decisions. We compare the imperfect cost allocation of cost systems based on heuristics to the ideal cost allocation of a benchmark model. First, we find that more complex cost systems are associated with substantially lower profit errors. Second, we decompose the profit error and find that production quantity errors are larger than product portfolio errors indicating that reducing product portfolio errors is less critical in designing cost systems. We also document that overproduction errors are larger than underproduction errors and errors from keeping unprofitable products are larger than errors from dropping profitable products suggesting that cost systems tend to underestimate full costs. Third, we find that profit errors increase for more complex cost systems as resource sharing levels rise, which is an interesting counter intuitive result.

Keywords: Cost systems; Simulation; Pricing; Product mix; Product portfolio; Decision; Activity-based costing; Profit error; Cost heuristics; Cost allocation; M41; D42; M21; C63 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11156-017-0678-1

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