Estimating Activity Costs: How the Provision of Accurate Historical Activity Data from a Biased Cost System Can Improve Individuals' Cost Estimation Accuracy

An integral component of effective cost control and performance evaluation is the ability to accurately estimate relationships between activities and overhead costs (i.e., activity costs). Individuals using a single cost pool system often have to rely on memory of historical activity data when estimating activity costs. If individuals' recall of data is representative of the historical data, then reliance on memory should not be detrimental to cost estimation accuracy. However, individuals often possess incorrect initial beliefs about activity costs. These incorrect beliefs are expected to serve as an anchor from which individuals make insufficient adjustments when estimating activity costs based on memory of historical activity data. Multiple cost pool systems frequently provide biased standard rates; however, such systems also provide accurate historical activity data when individuals estimate costs. I extend prior accounting research by experimentally examining whether a multiple cost pool system's provision of accurate historical activity data improves activity cost estimation for individuals with incorrect cost beliefs even when the cost system also provides biased standard rates. The main contribution of the study is its finding that the multiple cost pool system's provision of historical activity data improves individuals' adjustments from their incorrect initial cost beliefs when estimating activity costs, thereby increasing their estimation accuracy. The results suggest that this improved adjustment from incorrect initial cost beliefs occurs because the provision of historical activity data improves individuals' recognition of how wrong their initial cost beliefs were in reality. This result is achieved even though the cost system provides biased standard rates. The ability of flawed cost systems to improve individuals' activity cost estimation in other such ways has received little research attention and is important because of its potential for improving managerial decision making.