Analytics of costing system design

Costing is an estimation or approximation exercise: within a relevant range, management accountants seek to derive a linear function that approximates underlying true cost behaviour. This chapter discusses the research literature in this area, identifying where there is sufficient knowledge to guide practitioners and where further advances are needed in both costing research and practice. The focus is mainly on analytical and empirical work based on theoretical constructs. Section 10.2 briefly discusses what costing systems should seek to approximate, while Section 10.3 looks at how system objectives are pursued. The next section provides an overview of where approximations can go wrong. Section 10.5 discusses how to choose among alternative costing system approximations. Section 10.6 concludes with some avenues to advance costing system design research and practice.