Question

Error costs are costs associated with

a. the measurements required by the cost management system.
b. the noncompliance of financial laws and regulations.
c. producing an additional unit of a product or service.
d. making poor decisions based on bad cost information.

Answer 1

Error costs arise from making poor decisions based on inaccurate cost information, leading to inefficient resource allocation and potential social costs, including those affecting third parties and the environment.

Step-by-step explanation:

Error costs are costs associated with making poor decisions based on bad cost information. When a firm relies on inaccurate cost data, the decisions made can lead to inefficient allocation of resources, resulting in losses or missed opportunities for the firm. This kind of error can be considered a transaction cost, which encompasses the money, time, and effort necessary to make decisions. It's also related to conformity costs, where there may be a divergence between what a decision-maker desires and the outcome they achieve due to inaccurate information.

In the broader economic context, poor decision-making can lead to social costs, which include both private costs borne by firms and additional costs incurred by third parties outside of the production process, such as pollution. The misallocation of resources stemming from poor cost information can contribute to these externalities, exacerbating the effect on third parties and the environment.