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A risk analysis approach for time equation-based costing

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  • S. HOOZÉE
  • L. VERMEIRE
  • W. BRUGGEMAN

Abstract

Recently, time equation-based costing has been developed as a cost modelling approach in which activity times are calculated using time equations. Drawing on mathematical statistics, this paper develops a risk analysis approach and shows how it can be used to determine the impact of measurement errors in time equation input parameters on the variability of estimated activity times. Furthermore, a method is elaborated that can be used to evaluate the impact of adding terms to time equations on the reliability of estimated activity times and conditions are derived under which this refinement enhances the reliability of estimated activity times. More specifically, the results suggest that when time equations are refined, the reliability of the estimated activity time rarely deteriorates once the dominant time driver effects (i.e., in terms of large means) have been included in the equation.

Suggested Citation

  • S. Hoozée & L. Vermeire & W. Bruggeman, 2009. "A risk analysis approach for time equation-based costing," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/556, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:09/556
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    File URL: http://wps-feb.ugent.be/Papers/wp_09_556.pdf
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    References listed on IDEAS

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    3. Mark C. Anderson & Rajiv D. Banker & Surya N. Janakiraman, 2003. "Are Selling, General, and Administrative Costs “Sticky”?," Journal of Accounting Research, Wiley Blackwell, vol. 41(1), pages 47-63, March.
    4. Lukka, Kari & Granlund, Markus, 2002. "The fragmented communication structure within the accounting academia: the case of activity-based costing research genres," Accounting, Organizations and Society, Elsevier, vol. 27(1-2), pages 165-190.
    5. Noreen, Eric & Noreen, Eric & Soderstrom, Naomi, 1994. "Are overhead costs strictly proportional to activity? : Evidence from hospital departments," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 255-278, January.
    6. E. Labro & M. Vanhoucke, 2005. "A simulation analysis of interactions between errors in costing system design," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/333, Ghent University, Faculty of Economics and Business Administration.
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    Cited by:

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