Carolyn M Callahan
University of Arkansas, Fayetteville
E Ann Gabriel
Ohio University
Rodney Smith
University of Arkansas, Fayetteville
Abstract: This paper investigates the value of costless inter-firm cost correlation and information technology( IT ) investment on required product cost accuracy, production decisions, and ultimately firm profitability. During the last 15 years, many companies have made substantial investments in "new and better" product costing systems in an attempt to obtain more accurate product costs. There is little evidence, however, that links such investments to firms' production decisions and corresponding profitability in a competitive market environment. We argue that the benefit of additional IT investments many be mitigated by costless external market inter-firm cost correlation. We develop a model to explain the appropriate level of IT to improve the accuracy of firm's product costing systems given the competitive environment faced by the firm. Using simulation techniques, we further illustrate the value of incorporating the known inter-firm cost correlation in a production decision rule. We observe that decisions informed by product market information result in higher profitability than naive decisions that focus only on costs. This information could be helpful to firm managers in establishing the optimal level of IT investment for their specific market environment.
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