5.3. Cost structure
A review of European surveys relating to cost structures of manufacturing companies by Brierley
et al. (2001) indicated that direct material costs tend to be higher than indirect costs. They conclude
that if indirect costs make up a relative small proportion of total costs in some industries it may not be
worthwhile investing in sophisticated accounting methods to allocate indirect costs. Kaplan and Cooper
(1998) advocate that firms with high indirect costs should assign these costs using sophisticated systems,
since unsophisticated systems are likely to report distorted costs. Conversely, where the proportion of
indirect costs is low, direct costing may be appropriate or, if indirect costs are assigned to cost objects,
unsophisticated traditional costing systems may not result in the reporting of seriously distorted costs.
Thus, the following hypothesis is tested:
Hypothesis 3 (H3). There is a positive association with the proportion of indirect costs within an
organization’s cost structure and the level of cost system sophistication.
5.3. Cost structureA review of European surveys relating to cost structures of manufacturing companies by Brierleyet al. (2001) indicated that direct material costs tend to be higher than indirect costs. They concludethat if indirect costs make up a relative small proportion of total costs in some industries it may not beworthwhile investing in sophisticated accounting methods to allocate indirect costs. Kaplan and Cooper(1998) advocate that firms with high indirect costs should assign these costs using sophisticated systems,since unsophisticated systems are likely to report distorted costs. Conversely, where the proportion ofindirect costs is low, direct costing may be appropriate or, if indirect costs are assigned to cost objects,unsophisticated traditional costing systems may not result in the reporting of seriously distorted costs.Thus, the following hypothesis is tested:Hypothesis 3 (H3). There is a positive association with the proportion of indirect costs within anorganization’s cost structure and the level of cost system sophistication.
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