Robust Cost Systems

For discussion only Exceedingly preliminary and incomplete Please do not cite or distribute / post on a website Robust Cost Systems Organizations employ a cost system to estimate the costs of their products and customers, even though such estimation is not an economically sufficient aggregation of the underlying production function and results in sub-optimal decisions. While there are many prescriptions regarding system design, there is little in the way of systematic analysis. Using numerical simulations, we investigate the effects of choices pertaining to cost system design on the robustness of the system. We focus on three choices: how many cost pools to form, how to group resources into cost pools, and how to select the drivers for the cost pools. In the context of selecting a product portfolio, we examine the properties of internally-consistent cost systems and define robustness as the profit achieved relative to the profit in a benchmark solution. In a multi-period setting, we perturb the environmental parameters that define the market structure and the production function, and define robustness as the change in profit relative to the change in the benchmark solution. We generalize our findings by considering alternate production and market configurations