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Management and cost accounting information influence managers’ judgments and decision making and can significantly affect organizational success. Increases in cost system complexity can lead to greater accuracy, but these systems are still susceptible to errors. The prospect for increased accuracy with a more complex cost system could lead to complacency concerning the reliability of the provided information, as managers overly rely on the cost information, feeling confident that it is without material inaccuracies. In our study, we evaluate how confidence in the cost system can affect managers’ judgments and distract their attention away from potential cost errors. To do this, we experimentally analyze the extent to which managers recognize signals that point to material cost inaccuracies causing adverse effects to the firm (i.e., low profitability), and the effect of cost system complexity in this process. We further examine whether market competition diverts managers’ attention away from the impactful cost system inaccuracies, and study competition’s joint effect with cost system complexity. We predict and find that greater cost system complexity inspires greater confidence in the cost system, which decreases managers’ attention to the accuracy of the system, making them less likely to discover material cost errors. We also find that high competition diverts managers’ attention from the cost system, and that cost system complexity and competition can act as substitutes in diverting managers’ attention away from potential cost system errors. These findings show that although greater complexity garners increased manager confidence, this confidence can lead to adverse effects to the firm as impactful cost errors can go undiscovered.
Ella Mae Matsumura, University of Wisconsin-Madison
Tyler F Thomas, University of Wisconsin-Madison
Dimitri Yatsenko, University of Wisconsin-Madison