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Past Issue • Jul-Sep 2014

Do Traditional Accounting Systems “Hide” Costs?

Do traditional, volume based accounting systems hide important costs such as cost of compliance with regulations? Using an example of environmental costs in the steel industry, Professors Satish Joshi and Ranjani Krishnan explore the extent to which the costs of regulatory compliance are “visible”, i.e., reported explicitly by firms’ accounting system, and “hidden”, i.e., obscured under other cost categories. Econometric analysis suggests the presence of substantial hidden costs, which at the margin, are 8-10 times the reported visible costs. The results underscore the importance of investments in more detailed costing systems that capture various types of hidden costs. Introduction The primary functions of a cost system include estimation of the costs of objects such as, activities, products, processes, services and customers. The information generated by a firm’s costing system is used to support product and service decisions, enable cost control and performance evaluation and support external financial reporting to investors, regulators, and other interested parties.

ABOUT THE AUTHORS

  • Satish Joshi

    Satish Joshi

    Associate Professor in the Department of Agricultural, Food, and Resource Economics, Michigan State University.
  • Ranjani Krishnan

    Ranjani Krishnan

    Professor of Accounting and Information Systems and Plante & Moran Faculty Fellow at the Eli Broad Graduate School of Management, Michigan State University.
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