Simultaneous Estimation of Cost Drivers.

Abstract

Abstract Managers frequently choose the amounts to expend in various activities simultaneously rather than sequentially. Quality costs provide a common example. When managing quality, decisions to invest in different types of prevention activities are made jointly. For example, spending more on maintenance simultaneously reduced the spending necessary on supervision. Similarly, scrap costs are often traded off against the costs of prevention and appraisal activities. Our article is motivated by field observations at an automobile lamp manufacturing plant. Specifically, we estimate two observed effects: (1) the influence of lamp design on the consumption of overhead resources during manufacturing (e.g., the effect of multicolor designs on supervision costs) and (2) the interdependence among supervision, maintenance, and scrap costs. One way to understand cost drivers and manage costs is to employ an activity-based costing approach (Cooper and Kaplan 1991, chap. 5; Young and Selto 1991). With this approach, prevention costs of supervision and maintenance are allocated to products on the basis of hours of supervision and maintenance, and scrap costs are apportioned on the basis of physical scrap levels. Quality-related costs are reevaluated after products are redesigned and processes reconfigured to determine if quality related costs have indeed decreased. With such an approach, simultaneous effects of costs are not estimated. We thank three anonymous reviewers for their comments and In our approach, we simultaneously estimate interdependencies among activities. Instead of supervision hours, maintenance hours, and physical scrap levels, we use product and process design variables as cost drivers of supervision, maintenance, and scrap costs. Selecting product and process variables as cost drivers allows us to estimate the effect of alternative lamp designs on quality costs incurred during manufacturing. We also explicitly consider simultaneity. For example, our estimation procedure recognizes that maintenance costs affect supervision costs and vice versa and that both costs are affected by product and process design choices. Our analysis provides valuable information to managers. At our site, designers use quality costs associated with different design features to guide future product designs and modifications. Similarly, as operations managers experiment with different methods to manage complexity, the simultaneous cost estimation enables them to evaluate which prevention activities are successful in reducing scrap.

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