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

and both number of setups and number of distinct parts, as suggested by the cost hierarchy. In addition, our empirical results rejected the proportionality assumption for all seven departments. In sum, our results suggest that indirect production labor costs are associated with multiple cost drivers, and the relation between these variables is not proportional. Since managers make daily operating decisions based on their information, we measure the extent of product cost distortions induced by traditional labor- based cost allocations. This result provides evidence on the usefulness of activity based costing systems for managerial decision making as it documents that the product cost estimates based on the traditional system may be distorted. We then examined the predictability of the cost hierarchy model. We find that the simple method used at our research site to estimate indirect production labor costs performs remarkably well in predicting daily departmental costs. Whether this finding reflects the true underlying production and cost relation, or whether it is an artifact only of managers reacting to the existing information system remains as another direction for future research. Specifically, it will be insightful to evaluate whether and how indirect cost behavior changes when a firm changes its cost accounting system. Our result on the usefulness of cost hierarchy for cost prediction 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). R eferences R éférences R eferencias 1. Abernethy, M.A., Lillis, A.M., Brownell, P. and P. Carter. 2001. Product Diversity and Costing System Design: Field Study Evidence. Management Accounting Research 12, 261–280. 2. Anderson S. W. and K. L. Sedatole. 2013. 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The Econometric Analysis of Time Series . 1st edition. Oxford, England: Philip Allan Publishers Ltd. 17. Harvey, A.C. 1993. Time Series Models . 2 nd edition. Hertfordshire, England: Harvester Wheatsheaf. 18. Hilton, R.W. and D.E. Platt. 2014. Managerial Accounting: Creating Value in a Dynamic Business Environment . 10th Edition. McGraw-Hill 19. Ittner, C.D., W.N. Lanen, and D.F. Larcker. 2002. The association between activity based costing and manufacturing performance. Journal of Accounting Research : 711-726. 20. Ittner, C. D., D. F. Larcker, and T. Randall. 1997. The Activity-based Cost Hierarchy, Production Policies and Firm Profitability. Journal of Management Accounting Research 9: 143–162. 21. Ittner, C.D., and D.F. Larcker. 2001. Assessing Empirical Research in Managerial Accounting: a Value-based Management Perspective. Journal of Accounting and Economics , 32 (1): 349- 410. 22. Ittner, C. D., and J. P. MacDuffie. 1995. Explaining Plant-level Differences in Manufacturing Overhead: Structural and Executional Cost Drivers in the World Auto Industry. Productions and Operations Management 4 (4): 312–334. 23. Innes, J., F. Mitchell, and D. Sinclair. 2000. Activity- based Costing in the UK’s Largest Companies: a © 2021 Global Journals 2 Global Journal of Management and Business Research Volume XXI Issue II Version I Year 2021 ( ) D 14 Cost Hierarchy: Evidence and Implications