Overhead Cost Pool Classification and Judgment Performance
66 Pages Posted: 11 Jul 2007
Date Written: June 26, 2007
Abstract
This paper addresses the research question: does an organization's choice of overhead cost pool classification affect individuals' predictive judgments about overhead costs? I use psychology research to develop hypotheses about how overhead cost pool classification affects the expected accuracy of participants' predictions of a target overhead cost based on their estimation of the coefficients relating the target overhead cost to four predictor overhead costs. The predictor costs are located either within the same overhead pool as the target cost or in another pool. I vary relationships among the costs such that the larger predictor-target coefficient is either within a single cost pool or across different cost pools, and the relationships are positive or negative. I hypothesize that implicit coefficients on predictors within the same pool as the target cost will be estimated more accurately than implicit coefficients on predictors in a different pool. I also hypothesize that predictions of the target cost are affected by an interaction of the location of the stronger predictor and the sign of the relationships. As hypothesized, participants estimate implicit coefficients within a pool more accurately than coefficients across pools. Further, the location of the stronger predictor and the sign of the relations interact, such that the effect of the location of the stronger predictor on judgment accuracy is greater when relationships among costs are negative than when they are positive. I thus provide theory-consistent evidence of a cognitive effect of overhead cost pool classification in addition to informational effects modeled by the analytic literature.
Keywords: cost pools, classification, judgment, cost estimation
JEL Classification: M40, M41
Suggested Citation: Suggested Citation
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