An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Carolyn M. Callahan
University of Arkansas - Fayetteville

E. Ann Gabriel
Ohio University

Rod Smith
University of Arkansas - Fayetteville

Abstract: We analytically and numerically demonstrate that within a strategic Cournot game the value of firms’ investment in IT (to achieve better product cost accuracy) depends upon the quality of external benchmarking information that provides an alternative source of information upon which to guide market competition. In an imperfect market setting, we incorporate an endogenous cost signal in our model and consider the impact of IT investment, Activity Based Costing (ABC) safety capacity, ABC resource cost, and equilibrium product cost system variance on expected profit. With external benchmarking, we find that the firm can decrease their investment in IT to achieve product cost accuracy, yet maximize expected profit or minimize the profitability variance. That is, when benchmarking information is sufficiently accurate the need for additional IT investment is diminished and profitability improved.

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