Academic journal article e-Journal of Business Education and Scholarship Teaching

Recognising the Effects of Costing Assumptions in Educational Business Simulation Games

Academic journal article e-Journal of Business Education and Scholarship Teaching

Recognising the Effects of Costing Assumptions in Educational Business Simulation Games

Article excerpt


Business simulations are a powerful way to provide experiential learning that is focussed, controlled, and concentrated. Inherent in any simulation, however, are numerous assumptions that determine feedback, and hence the lessons learnt. In this conceptual paper we describe some common cost assumptions that are implicit in simulation design and discuss the implications for the lessons that are learnt from the simulation. In particular, concerns are raised about misconceptions that may arise when the assumptions are not recognised. Examples are drawn from a popular business simulation. We conclude that, while there are advantages from both simple and sophisticated approaches to costing, the impact on profits can be huge. When the assumptions are not explicit, they can send signals about cost behaviour which are inconsistent with reality. We recommend that when using a business simulation the facilitator explicitly recognise the assumptions, and thereby recognise the generalisations that can, or can't be drawn from the simulated experience.

Keywords: Business simulation games; costing assumptions; learning; assessment strategies.


Recent economic recession has highlighted the fragility of profits in the face of falling demand. In these periods of contraction it is imperative that organisations have a good understanding of their cost drivers so that appropriate actions can be taken. Traditional, volume-based cost systems send misleading signals which can focus cost reduction on eliminating profitable products or services, or keeping unprofitable ones. Similarly, the 'sticky' nature of some costs mean that even appropriate actions may not achieve the intended results immediately (Malcom 1991; Mak and Roush 1994; Balakrishnan et al. 2011b).

It has long been argued that cost estimation and cost allocation are often not well understood by management (Kaplan 1990). Even with increasing understanding and the cost-effective technology necessary to provide more accurate costing, the adoption of sophisticated costing systems, such as Activity Based Costing (ABC), has been lower than might be predicted. This may be attributed to the very complex nature of cost behaviour. Organisations face a difficult balance between the benefits of more precise information and the financial and cognitive investment necessary to trace overhead costs to cost objects (Brierley 2010).

There is a danger that managers will accept the costing system as a representation of actual cost behaviour. Similarly, over-simplified cost behaviour in business simulations may lead to misconceptions when applying the learning from the simulation to real organisations. Whereas accounting-specific education recognises the complex nature of cost behaviour, business simulations often target a wider audience and have different learning objectives. Naive or incorrect cost assumptions and calculations which may apply to the simplified relationships inherent in a business simulation may fail to generalise to more complicated competitive environments. Examples include the confusion between an "average" and a "marginal" cost; or opportunity costs such as the opportunity cost of capital, which is dynamic in nature and context specific, but not always applied in this way. This is in addition to lack of clarity regarding when to (or not to) apply well-known costing systems, such as ABC, volume-based costing, and throughput costing.

Business Simulation games nowadays are often used for teaching and training purposes (Tunstall and Lynch 2010; Armer 2011; Alsaaty 2014). Interestingly, managerial costing options in such educational games are often limited to working with, and interpreting, fixed and variable cost; along with cash flow; leaving the above potential misconceptions about marginal and average cost, along with opportunity costs, unattended.

This conceptual research illustrates a number of important cost "mis"-estimations, and argues for greater transparency and sophistication around various managerial costing issues in today's business simulation games. …

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