Product Costing Systems: Information Economics and Implementation

Academic research in managerial accounting has focused on the search for general principles or general procedures that can be brought to bear in making accounting decisions in a variety of particular settings. Because managerial accounting does not consist of a set of codified practices, we expect these principles and procedures to address the costs and benefits that they create. This cost/benefit orientation has come to be embodied in managerial accounting theory by the information economics model. The principal message of this paper is that the information economics model is not sufficient to guide decision makers in solving many accounting problems. It focuses on the definition of a solution rather than on the process by which a solution may be found. In this paper, we address directly the complexity of the cost system design problem and find that it falls into the category of problems for which no known algorithm exists to solve all cases. We examine the performance of well-established cost accounting heuristics, and develop a different algorithm for making cost system choices. These algorithms are evaluated using simulations.