Tradeoffs within costing systems between incentives and measurement objectives

Abstract

Explains that a common problem of cost control at design stage is the firm’s (manager’s) desire for the lowest cost compatible with supporting innovation and the designer’s preference for the optimal design, which may be unnecessarily sophisticated. Develops a mathematical model to represent this situation, pointing out that the manager is usually unaware of the design alternatives unless they are revealed by the designer, but can use budgetary limits and “load” costs onto certain cost drivers (e.g. number of parts) to influence the designer’s choice and align his/her interests with those of the firm. Suggests that the difference between actual and “loaded” costs is a function of the non‐cost benefits from design choice (e.g. competitive edge) and the degree of information asymmetry between manager and designer. Considers the implications for costing activities and the limitations of the model.

Citation

Alles, M., Datar, S. and Gupta, M. (1998), "Tradeoffs within costing systems between incentives and measurement objectives", Managerial Finance, Vol. 24 No. 1, pp. 1-18. https://doi.org/10.1108/03074359810765291