Toward an Understanding of the Sophistication of Product Costing Systems

Prior research into the sophistication of product costing systems has defined sophistication in terms of the methods used to include indirect overhead costs in product costs. Based on data collected from a questionnaire and field study interviews with British management accountants, 16 different definitions of sophistication were discovered, and the three main definitions were: (1) the assignment of indirect overhead costs to product costs, (2) the inclusion of all costs in product costs, and (3) the understandability of product costs by nonaccountants. When these three types of sophistication were measured by the number of cost pools and the number of cost drivers, all of the product costing systems were simple. Both of these measures of sophistication were unrelated to the management accountants' satisfaction with the accuracy of product costs. The implication of these findings is that the term sophistication is too broad to have any meaning in relation to product costing systems. Given that sophistication can be defined in many different ways, research should concentrate on studying narrowly defined issues such as the three definitions of sophistication identified above. As satisfaction with product cost accuracy was not related to the number of cost pools and the number of cost drivers used in product costing systems, the importance of the treatment of overhead to increasing management accountants' satisfaction with the accuracy of product costs seems to be overstated.