Risk cost accounting and bottom price calculation – A risk management information system

Abstract

Due to legal regulations, most firms have installed risk management systems that monitor existence-threatening risks. Minor risks are usually not in their focus so that these systems are often not adequate for an effective operational risk management as they lack of a consistent quantification, valuation, and handling of risks. In particular for service providers who offer services at different levels, considering risks and their potential costs is crucial for the pricing scheme. Therefore, this paper presents a new kind of a risk management information system that extends the traditional cost accounting by introducing the concept of risk costs. This allows a consistent and uniform valuation and comparison of risks as well as an easy integration into existing enterprise IS. Besides the provision of detailed overviews of the risk situation of cost centers, cost units, business units, business areas etc., different levels of risk adjusted bottom prices for products and services can be calculated.