Parametric Accounting

from the Perspective of Competitive Advantage

by
Edwin B. Dean

Dean (1989c) proposed parametric accounting as a research topic in America. However, it was already well established in Japan as cost tables (Yoshikawa, Innes, and Mitchell, 1990). Dean (1995b) shows how this can be extended into a powerful mathematical form of cost deployment within target costing using the qualities of the process, as well as the qualities of the product.

Parametric accounting includes collecting multivariate non-cost qualitie data along with cost data and placing it in the data base associated with the cost data. This can be viewed as a row within a spreadsheet like data base which contains the entity name in the first column, the entity cost in the second column and associated entity qualitie values in columns to the right. This permits parametric cost analysis to be applied to the data to obtain equations which represent the variation of the entity cost with the variation of the non-cost qualities.

The key is to account for the qualities, including cost or price, of entity which can be a product, a service, a process, an activity, or even a customer. By using a direct charge system on can handle accounting under both generally accepted accounting principles (GAAP) and activity based costing (ABC). The data structure for this becomes {GAAPaccount,ABCaccount,cost,other_qualitie_data}. Then, parametric accounting can be applied to both the GAAP and ABC domains by appropriate summation.

The application of parametric cost analysis generates cost equations:

gaapcost_i = f_gi(qualities)
abccost_j = f_aj(qualities)

for GAAPaccount i and ABCaccount j. These can then be used to estimate new entity costs given changes in the qualities. This can greatly assist the target costing and activity based management processes.

Note that the balanced scorecard (Kaplan and Norton, 1996) is a form of parametric accounting.

References

Dean, E. B. (1989c). "Cost Analysis: Research Directions," presented at the Second Joint National Conference of the National Estimating Society and the Institute of Cost Analysis, Washington DC, 5-7 July.
Dean, E. B. (1995b). "Parametric Cost Deployment," Proceedings of the Seventh Symposium on Quality Function Deployment, Novi MI, 12-13 June.
Kaplan, R. S. and David P. Norton (1996). The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, Boston, MA, USA.
Yoshikawa, T., J. Innes, and F. Mitchell (1990). "Cost Tables: A Foundation of Japanese Cost Management," Journal of Cost Management, Fall, pp. 30-36.

Professional Societies

Mathematical Accounting Society (Japan)

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