Accuracy of Assignments
Assigning costs accurately to cost objects is crucial.Accuracy is not evaluated based on knowledge of some underlying “true” cost. Rather, it is a relative concept and has to do with the reasonableness and logic of the cost assignments methods used. The objective is to measure and assign, as well as possible, the cost of the resources consumed by a cost object. The intuitive and somewhat tongue-in-check guideline is expressed as follows: ''It is better to be approximately correct than precisely inaccurate.'' Some cost assignment methods are clearly
more accurate than others. For example, suppose you want to determine the cost of
lunch for Ryan Chesser, a student who frequents Hideaway, an off-campus pizza parlour. One cost assignment approach is to count the number of customers at the
Hideaway between 12:00 P.M. and 1:00 P.M. and then divide the total
receipts earned during this period by this number of customers. Suppose that this comes out to $5.175 per lunchtime customer(note the three-decimal precision). Thus, based on this approach, we would conclude that Ryan spends $5.175per day for lunch. Another approach is to go with Ryan and observe
how much he spends. Suppose that he has a small pizza, salad, and a medium drink each
day, costing $6.50. It is not difficult to see which cost assignment is more accurate. The
$5.175 cost assignment is distorted (in spite of its three-decimal precision) by the consumption patterns of other customers
(cost objects). As it turns out, most lunchtime clients order the luncheon special for
$4.99 (a mini-pizza, salad, and medium drink).
Distorted cost assignments can produce erroneous decisions and bad evaluations. For example, if a plant
manager is trying to decide whether to continue producing power internally or to
buy it from a local utility company, then an accurate assessment of how much it is
costing to produce the power is fundamental to the analysis. An overstatement of the cost
of power production could suggest to the manager that the
internal power department should be shut down in favor of external purchase, whereas a more accurate cost assignment might reveal the opposite. It is easy to see
that bad cost assignments can prove to be costly. As the pizza example suggests, establishing a cause-and effect relationship between the cost to be assigned and the cost object is the key to creating a reasonably accurate cost assignment.