Nikki Bronson
In an article by Kenneth A. Merchant and Michael D. Shields, “When and Why to Measure Costs Less Accurately to Improve Decision Making,” it shows that certain cost systems are less accurate, and more advantageous, than cost technology. The companies use biases and imprecision that is legal, improves decision making, and influences behavior positively. Upwardly biased costs are one example of this. Firms that face competitive pricing overstate product cost in order to cover variable costs. From here, a firm is able to offer discounts without going below production cost. Another example is downwardly biased costs. Firms will use the rationale of “target costing” to set the product price at what it should be. These targets cause innovation and improvement since they are so far below the current standards. Lower precision is the third accuracy cost system. It is designed to make data that not precise. The outcome of this system is that some costs are overstated and some are understated. This causes employees to focus on performance areas that managements decides is important, and causes continuous improvement and competitive advantage. Of course, using a less accurate cost system is not beneficial to all companies. For example, a company that is selling a commodity does not need to worry about having too much competition and would not benefit from use inaccurate data. The less accurate cost system strategies are used by management to implement competitive strategies, not develop them. The choice to use a less accurate cost system should be made to help motivate and educate the employees of a company. As summarized by “When and Why to Measure Costs Less Accurately to Improve Decision Making,” Certain cost systems are less accurate, and more advantageous, than cost