An empirical investigation of symptoms of obsolete costing systems and overhead cost structure

Abstract

The purpose of this study is to identify the most frequently found symptoms of obsolete costing systems and to investigate whether these symptoms are associated to the proportion of overhead related to non‐output unit activities in a business environment in which traditional costing systems are prevalent. Since traditional costing systems use output‐unit related cost drivers to allocate overhead, these systems are more likely obsolete when a large proportion of a firm’s overhead is not directly related to its output volume. The results from a survey with a sample of Hong Kong manufacturing companies indicated that the four most frequently encountered symptoms of obsolete costing systems were: competitors’ prices for high‐volume items appear to be unrealistically low; no resistance from customers to higher prices; frequent use of accounting department to conduct special studies; and establishment of department’s cost systems for decision making. It was also found that the proportion of a firm’s overhead related to non‐output unit activities was positively associated with the total frequency rating of all the proposed symptoms of problem costing systems, suggesting that using an outdated overhead allocation method could be a major cause for a costing system to become obsolete. The implications of these results are discussed.

Citation

Chan, S.Y. and Suk‐Yee Lee, D. (2003), "An empirical investigation of symptoms of obsolete costing systems and overhead cost structure", Managerial Auditing Journal, Vol. 18 No. 2, pp. 81-89. https://doi.org/10.1108/02686900310455065