TITLE:
Contextual Determinants and Performance Consequences of Cost System Sophistication in UK Services
AUTHORS:
Hanadi Mohammed Alshamlan
KEYWORDS:
Cost System Sophistication, Contingency Theory, Costing System Design, Mediation Fit, Structural Equation Modeling, Non Manufacturing Firms, Financial Performance
JOURNAL NAME:
Open Journal of Accounting,
Vol.15 No.4,
October
15,
2026
ABSTRACT: Achieving optimal performance partly depends on operating a costing system whose level of sophistication matches the requirements of the surrounding context. Prior research on cost system sophistication (CSS) has been conducted largely in manufacturing settings and, even restricted to that setting, has produced markedly inconsistent findings regarding which contextual factors actually drive it. This study examines the contingent determinants of CSS, conceptualised as a continuum based on the number and type of cost pools and cost drivers in use rather than a binary activity based costing (ABC) adopter/non adopter classification, among 204 UK non manufacturing business units. It traces CSS’s consequences for non financial and financial performance using a mediation form of contingency fit and structural equation modelling. Competition and cost structure are found to be significant, positive direct determinants of CSS, while service diversity, differentiation strategy, cost leadership strategy, and organisational size are not; cost structure fully mediates the effect of differentiation strategy on CSS. CSS is positively related to service quality, service cycle time reduction, and cost reduction, and is associated with financial performance both directly and indirectly, partly through service quality and partly through cost reduction. These patterns diverge in several respects from prior CSS and ABC adoption studies, and the paper offers measurement and sector based explanations, while treating them as plausible interpretations rather than demonstrated facts given the cross sectional design. The findings extend contingency based costing research to an under examined non manufacturing setting and offer managers evidence based, rather than universal, guidance on when investment in a more sophisticated costing system is likely to be warranted.