Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 21 Issue 2

highlighted as a part of the main results, we also examine whether indirect costs vary in proportion to activities (Noreen and Soderstrom, 1994) and provide evidence rejecting the proportionality assumption. In addition to providing empirical evidence on cost hierarchy, we measure the extent of product cost distortions induced by traditional labor-based cost allocations. This analysis provides further evidence on the usefulness of activity based costing systems for managerial decision making (Banker et al., 1990) as it documents that the product cost estimates based on the traditional system may be distorted. However, we do not find that a more detailed cost system based on our cost hierarchy results in substantially better cost prediction. Rather we document that traditional costing system performs as well as a cost system based on non-volume related cost drivers for the prediction/planning of total costs at our research site. This last result cautions that the overall impact of sophisticated costing systems on managerial decision making and firm performance may be limited, and echoes the skepticism of Dopuch (1993) and results of Ittner et al. (2002). The remainder of this paper is organized as follows. Section 2 describes the research site, and presents descriptive statistics for the data collected at the research site. The estimation models and empirical results are discussed in section 3. Some managerial implication are presented in section 4. Concluding remarks are offered in section 5. II. r esearch s ite and d ata a) Research Site To conduct a time-series analysis of indirect production labor costs we looked for a research site that could provide us with detailed and reliable data on the variables of interest for a sufficiently long time period. To enhance the external validity of our analysis, we required a site that represented a common manufacturing environment involving multiple production departments ranging from fabrication to assembly. We wanted data identified with individual production departments to allow us to better match costs with activities, and examine patterns in these relations that varied across different production departments with different process characteristics. The research also required detailed data on indirect and direct labor costs and other potential cost drivers. The research site we selected satisfied all of these criteria. We collected the data for this research from a large manufacturer of floor maintenance equipment such as scrubbers, sweepers, burnishers and other cleaning equipment. The company is a world leader in its industry segment, and has received numerous awards for its manufacturing and employment practices. We obtained daily data for a consecutive five year period from the two plants of the company which are in close proximity to each other. A flow chart of the production process is presented in Figure 1. The production process begins in plant A, where parts and components such as casings, frames, and brushes are manufactured in accordance with production orders. These components are then shipped to plant B for further processing and assembly. The departments in Plant A exhibit a job shop type production environment with many small batches and workers performing a larger proportion of indirect activities, while the departments in Plant B exhibit an assembly line type production environment with fewer and larger batches and workers performing a smaller proportion of indirect activities. Plant A Plant B Figure 1: Production Process Flow Chart Paint Shop Brush & Steel wool Machine Shop Sheet Metal Final Assembly Welding g Component Assembly © 2021 Global Journals 2 Global Journal of Management and Business Research Volume XXI Issue II Version I Year 2021 ( ) D Cost Hierarchy: Evidence and Implications