The interplay between cost accounting knowledge and presentation formats in cost-based decision-making

Most studies on cost-based decision-making examine the profit impact of cost reports that rely on different methods to allocate costs. In practice, firms’ cost reports often employ the same cost allocation method with subtle variations in the way that the cost data are presented. This paper examines experimentally the profit impact of a cost report’s presentation format in relation to a decision maker’s level of cost accounting knowledge. Using a customer profitability report prepared using activity-based costing and presented in either a tabular or a graphical format, participants analyze a complex pricing and resource allocation task that affects firm profitability. The results suggest a strong relation between presentation format and cost accounting knowledge. Specifically, decision makers with a low level of cost accounting knowledge attain higher profits when they use a graphical format in comparison to a tabular format. More surprisingly, graphs (versus tables) have an adverse effect on profits for users with a high level of cost knowledge. This result has broad implications: in order to facilitate the decisions of a variety of users of accounting data (e.g. managers, external investors, etc.), firms may need to adapt the presentation format of their accounting data to the level of accounting sophistication of the users.     

Investment-Based Cost Accounting as a Fundamental Basis of Decision-Oriented Management Accounting

Decision making concerns over cost allocations, especially common cost allocations, have a long history. They are well canvassed in Thomas (1969 ) and Wells (1978 ). This article revisits the cost allocation debate, albeit in a new setting, and rehearses arguments relevant to long- and short-term decision contexts. Here a means is proposed to address those problems, namely to adopt the investment-based approach to cost accounting. This approach draws on ideas of Hotelling (1925 ), Preinreich (1938 ) and Schneider (1961 ), and applies the notion of net present value in another setting, namely to cost accounting theory. Research has revealed no discussion of this in the Anglo-American literature. This article shows analytically that the investment-based approach offers a general basis for decision-oriented cost accounting, as it combines investment theory with cost accounting and thereby connects long-term with short-term decisions. While reviewing primarily European literature, it also examines several Anglo-American works. The analysis reveals how for three classical decision problems—production program planning, purchase order lot sizes, and break-even price limits—two different types of costs, namely depreciation and material costs, have to be based on cash flows and net present value. The proposed investment-based approach permits an examination of the extent to which cost accounting concepts and cost information are relevant to those decisions. This theoretical concept is used to derive pertinent cost dimensions and to solve traditional problems of cost allocation. A caution is that the investment approach is limited to decision facilitating cost accounting. Whether it may be possible to couple it with agency theory and its focus on decision influencing has not been explored and is an issue for further research.     

The impact of cost allocation errors on price and product-mix decisions

We use simulations to examine the impact of cost allocation errors on pricing and product-mix decisions. We compare the imperfect cost allocation of cost systems based on heuristics to the ideal cost allocation of a benchmark model. First, we find that more complex cost systems are associated with substantially lower profit errors. Second, we decompose the profit error and find that production quantity errors are larger than product portfolio errors indicating that reducing product portfolio errors is less critical in designing cost systems. We also document that overproduction errors are larger than underproduction errors and errors from keeping unprofitable products are larger than errors from dropping profitable products suggesting that cost systems tend to underestimate full costs. Third, we find that profit errors increase for more complex cost systems as resource sharing levels rise, which is an interesting counter intuitive result.     

Data Fixation and the Use of Traditional Versus Activity-Based Costing Systems

An important debate in the contemporary accounting literature relates to the relative merits of activity-based versus volume-based product costing methodologies. Traditional volume-based costing systems are said to be flawed and may seriously mislead strategic decision making. Such arguments assume that decision makers use such information in an unproblematic way. This article reports on an experiment designed to investigate whether decision makers are able to overcome data fixation in a setting involving the use of product cost information. In response to criticisms of previous accounting studies of data fixation, subjects received some feedback after each decision, and were rewarded based on performance. The experiment involved subjects making a series of production output decisions based on detailed case information of a hypothetical firm facing different market conditions for each decision. A between-subjects design was utilized with two cost system treatments: activity-based costing (ABC) and traditional costing (TC). It was hypothesized that the group provided with ABC cost data would make 'optimal' decisions and the group provided with TC cost data would overcome fixation. The results of the experiment indicated that there was, in general, evidence of data fixation among TC subjects, but a small number of subjects did adjust to ABC costs. These results are discussed in the light of previous research and some future directions are outlined.     

Technological advances and the decision to invest

Technological advances impact a firm’s investment decision, as they affect the investment cost. They can also affect the profitability due to demand shocks. We study a firm’s optimal investment decision when technological advances occur as surprises and induce uncertain reductions in the investment cost and in earnings. Despite this complex setting we derive closed-form solutions for the investment option value and the investment threshold. When technological advances only impact the investment cost, we demonstrate significant contributions compared to existing research, which restricts the analysis by keeping the expected investment cost path constant. For example, we show that, albeit the investment threshold is constant, the option value is very sensitive in the expected impact of technological advances. Leaving the restrictive setting, we obtain more intuitive results, e.g. that more frequent technological advances increase the option value. When technological advances impact future earnings we find important long-term effects: the investment threshold increases, whereas the option value decreases. Finally, earnings volatility postpones investment, while uncertainty due to technological advances expedites investment.     

Usefulness of CCA Information for Investor Decision Making: A Laboratory Experiment

The aim of this study was to test the assertion of New Zealand company directors that CCA information was not useful for investor decision making. Subjects made investment decisions based on their predictions concerning two similar, real (identity disguised) companies. These decisions and other evaluations were made in a post-test only, control group design experiment. CCA's relevance and reliability according to particular definitions of these characteristics was thus assessed. The results show that current cost accounts are more useful for investor decision making because they are both more relevant and perceived to be more reliable than conventional historical cost accounts.     

The effect of cognitive style and sponsorship bias on the treatment of opportunity costs in resource allocation decisions

The incorporation of opportunity cost is stressed in normative approaches to resource allocation decisions. Empirical evidence has revealed a variety of behaviours. A consequence of inappropriate treatment of opportunity costs is an incorrect assessment of the economic consequences of resource allocation decisions. Improved understanding of why some managers treat opportunity costs inappropriately permits identifying situations where the incorrect economic evaluations will lead to sub-optimal resource allocation and therefore provides a basis for remedial action. This study identifies two conditional factors which potentially influence the way managers respond to opportunity cost information.These factors are managers' cognitive style and whether or not managers sponsor a project (project sponsorship), and it is argued that they influence managers' decisions on opportunity costs in situations in which opportunity cost implications are implicit. In particular, the paper proposes, first, that in the absence of project sponsorship, managers with an “intuitive” style of “taking in data” will tend to incorporate opportunity costs in their economic decisions whereas those wiht a “sensation” style will not. Second, it is suggested that because sponsorship encourages managers to ignore negative economic signals (sponsorship bias) any effects of cognitive style will be moderated in conditions where sponsorship is evident.A laboratory experiment with managers as subjects was used to examine these propositions. The results indicated that intuitive managers tended to incorporate opportunity costs in their decisions whereas sensation individuals appeared to focus more on the directness of the relationship between expenditure and a project to determine the relevance of the cost. Opportunity cost implications tended not to be identified by the sensation group. Evidence was found that sponsorship moderated the influence of cognitive style on decisions to include opportunity costs.     

Recent Evidence on Australian Current Value Accounting Practices: Is the Phoenix Rising from the Ashes?

There has been a perceptible movement in Australian accounting regulations towards various forms of current value accounting (CVA) in the past five years. These developments could reflect changing commercial attitudes to CVA in Australia. This paper presents evidence about the acceptance of CVA based on a survey of 176 public companies in Australia. It was found that the number of companies preparing comprehensive CVA accounts for external purposes has significantly increased since 1980. Furthermore, the majority of respondents rated a valuation basis other than historical cost as having more relevance to the resource allocation decisions of various users. While it is concluded that current value research is still an important topic for research and debate, the findings indicate that corporate acceptance of CVA will be continually hampered by a number of implementation obstacles.     

Cold,warm, warmer,hot! Locating financial literacy hot spots

One of the key challenges of the financial literacy agenda involves resource allocation decisions. Given competing priorities, an approach to identifying areas of greatest need is required. It is argued that such prioritisation may be determined by assessing vulnerability, referred to as ‘hot spots’ of vulnerability. This article examines the specific vulnerability ‘hot spot’ of financial fraud. Vulnerability is defined as those areas that have experienced comparatively greater concentration of financial fraud cases. Drawing on criminological theory, in particular aspects of the operational practice of ‘hot spots’ policing, a framework for resource allocation decision making within the financial literacy context is presented. Analogous with hot spots policing, concentration of resources to ‘known’ areas of vulnerability is likely to result in more impactful financial literacy outcomes.     

Why are some modes of acquisition more profitable? A study of the credit card industry

A key challenge in financial services marketing is attracting good customers to the firm. For most financial services firms, including credit card firms, a good customer is also a profitable customer. Managers would like to use marketing tactics that attract the most profitable customers while closely monitoring and perhaps limiting expenditures on marketing tactics that tend to attract relatively less profitable customers. Therefore, managers need to understand the relative effectiveness of different modes of new account acquisition and the impact that the various modes of acquisition may have on overall account profitability. To date, there have been very few studies that have calculated individual level customer profitability and then investigated the relationship between new customer acquisition source and customer profitability. That is, how do modes of acquisition differ in their ability to attract profitable customers? We answer this question using a proprietary and novel data set from the credit card industry. Of the four modes of acquisition used in this industry, we find that Internet and direct mail efforts generate more profitable customers than telemarketing and direct selling. We provide possible explanations for these findings. Our work adds to the growing literature in customer relationship management and our results have important managerial implications for resource allocation among acquisition strategies.     

A behavioural theory of the fund management firm

The paper outlines a behavioural theory of the fund manager (FM) firm comprising investment decisions (at stock and portfolio levels) by teams and individuals, and of an organisation process and contextual resource factors affecting decisions. FM organisational processes interacted with resources to enhance investment team decision conditions, costs and processes. Enhanced conditions and reduced decision costs were expected to improve the chances of FM success via new information production and better-quality decisions. These dynamic elements to FM firms can be interpreted as tentative organisational means to deal with major problems of behaviour, uncertainty and information asymmetry at the heart of the valuation, investment and performance problems facing FMs. Field research was conducted in 15 FM firms during 2004–2011. A grounded theory approach was employed in processing the data. This led to improvements in empirical understanding of behaviour within FM firms and markets. The results were discussed relative to relevant literature and previous grounded theory. This created a new conceptual tool to investigate FM underperformance and variety in FM styles. The paper demonstrated an empirically rich model of hierarchy, information production, capital allocation and other resource usage in financial institutions and discussed how this created further opportunities for research.     

Optimal Disbursement of a Sunk Resource and Decentralised Cost Allocation

We consider whether the allocation of the sunk cost of a central resource to operating divisions can be consistent with economically optimal resource consumption decisions. When it is recognised that the central resource is scarce, one may, in principle, defend the allocation of sunk cost, if it measures the opportunity cost of usage. However, typically it has been proposed that such allocations are, at best, a proxy for opportunity cost. Applying classical control theory techniques in a wide range of operating environments, we are able to identify cost allocations that exactly equal opportunity cost. Hence, for our model environment, we provide a rationale for sunk cost allocation in terms of guiding optimal decisions, in contrast to the traditional defence in terms of providing a proxy for opportunity cost. We demonstrate clearly how cost allocations are related to opportunity costs, and identify the circumstances under which the allocation of full costs or alternatively a fixed proportion (related to acquisition conditions) of costs, results in the implementation of economically optimal resource consumption decisions.     

From comfort to stretch zones: A field study of two multinational companies applying “beyond budgeting” ideas

This paper explores how change in the design principles of management control systems (MCSs) based on implementing the beyond budgeting (BB) ideas has influenced the transition of decision-makers from “comfort” to “stretch” zones and how this transition changed the supply of and demand for managerial information. This paper's starting point is based on the research evidence showing that there are many organizational problems associated with using budgets. Thus, this paper puts forth a previously neglected research context of companies that claim to have abandoned budgeting. In two cases, we illustrate how changes in the design of the MCS can create new management practices based on new ideas of information needed for decision-making. In particular, this paper illustrates how the use of new information provided by the MCS design, which is based on new principles, move decision-makers into the “stretch zone” characterized by new characteristics of decision-makers’ mindset and behavior. We also demonstrate how unbundling target setting, forecasting, and dynamic resource allocation enables better forward-looking and strategy-oriented decisions in situations requiring negotiation and learning.     

Sourcing parts of complex products: evidence on transactions costs, high-powered incentives and ex-post opportunism

This paper revisits evidence on the correlates of sourcing decisions in the US auto industry to see whether adoption of new contracting terms and early involvement of suppliers in design activities (e.g. “relational contracting”) yields different results as compared to previous findings. Previous studies find that US auto firms insource complex parts that require investments in specific assets. Absent large differences in production costs, the results suggest that transactions costs associated with external suppliers exceed transactions costs associated with internal suppliers (e.g. loss of high powered incentives). Using data on 156 sourcing decisions for process tooling (dies) of a new car program we find that under the new relational contracting regime, transaction cost theory continues to have explanatory power for sourcing decisions; however, attributes that favored insourcing in previous studies favor outsourcing in this setting. Moreover, more complex subassemblies are associated with fewer distinct suppliers than expected — evidence of a tendency to co-locate decision rights to reduce transactions costs related to system interactions. After controlling for transaction characteristics that are associated with the sourcing decision, we find no evidence that outsourcing is associated with increased ex post opportunism by the firm (e.g. agreement about contract completion); however, outsourced parts are submitted by suppliers for evaluation significantly later than insourced parts (e.g. delivery holdup).     

An empirical study of the usefulness of human resources turnover costs in australian accounting firms

This paper reports the results of a laboratory experiment designed to evaluate the usefulness of applying Human Resources Accounting (HRA) to the problem of labour turnover management decision making in a sample of Australian accounting firms. Useful was defined as a reduction in uncertainty and an increase in relevance and sufficiency. Using a pretest-post-test research design, 57 volunteer accountants responsible for personnel decisions were individually administered (1) a two-part pilot tested case study with and without Human Resources Turnover Costs (HRTC); (2) a questionnaire which measured subjects' response to levels of uncertainty, relevance and sufficiency of the information. Three specific hypotheses tested warranted the conclusion that HRTC information significantly reduced accountants' levels of uncertainty and increased their levels of relevance and sufficiency.     

税收福利成本文献述评

税收在资源配置过程中除有形的经济负担之外,还会产生无形的负担,即税收的课征会影响人们在经济活动中的决策。本文通过介绍税收福利成本概念,税收福利成本计量模型的介绍以及对税收福利成本实证研究的回顾三个角度对文献进行整理与评述,并进一步提出研究方向。     

Mandatory audit firm rotation: Fresh look versus poor knowledge

Our aim in this paper is to investigate the effects of mandatory audit firm rotation (MAR) on companies’ investment decision and auditor choice in a capital market setting. We compare a MAR regime with a non-MAR regime in a setting in which auditors’ independence and companies’ opinion shopping are real concerns. To capture auditor independence and opinion shopping, we model auditor biases (a conservative bias or an aggressive bias) and client firms’ incentives to engage auditors with desired biases. We find that when firms engage in opinion shopping, MAR improves investment efficiency for some firms but impairs investment efficiency for other firms. More generally, we contribute to the literature by demonstrating the real effects of auditing on corporate resource allocation decisions.     

Comparing the impact of monetary and nonmonetary human asset measures on executive decision making

Flamholtz (1976) proposed that monetary human asset measures possess an advantage over nonmonetary human asset measures in competing for a decision maker's attention and consequently result in different decisions. The results of his experiment did not, however, support this proposal. Consequently, he indicated that, should further research confirm his tentative (and qualified) findings, the present monetary orientation of human resource accounting research probably should be reassessed and the possibility of developing nonmonetary systems be considered. This paper reports how his proposal was re-examined. Judgment modeling was used to determine how 166 executives weighted monetary and nonmonetary measures in reaching their decisions. These subjects placed the greater emphasis on monetary human asset numbers in reaching their decisions. They also reached different decisions when utilizing the two different measures. These findings support Flamholtz's original proposal and indicate there is no need for directing the emphasis of human resource accounting research away from monetary systems.     

Bach Music Inc.: Impact of Price Pressure,Capacity Constraints,and a Special Order on Management Decision Making

This case has been developed for an introductory management accounting course at the undergraduate and MBA levels. Although the setting is relatively simple, it illustrates several management accounting issues that are relevant to firms of every size that produce a product or service under competitive pressures and capacity constraints. The case also integrates several topics that are often viewed as abstract by the students. Specifically, it deals with the concepts around cost‐volume profit analysis in a realistic environment, the tension between short‐term and long‐term decisions, discounted cash flow analysis, the impact of managerial incentives and compensation on decision making and the impact of operating leverage on profitability. The case was used successfully several times in an introductory course at the MBA level. Surveys of the students reveal that the case has contributed significantly to their learning and has clarified the concepts introduced in the case.     

The usefulness of financial and nonfinancial performance information in resource allocation decisions

In this article I evaluate the impact of adding nonfinancial performance information to reports containing financial information. I consider the association between nonfinancial information and the resource allocations and performance evaluations made by individuals involved with the governmental budget process. Tests indicated that the allocation decisions made by these individuals were not significantly associated with nonfinancial information. However, nonfinancial information was influential in the performance evaluations of both the agency and the agency's director. Although I found no association between nonfinancial information and resource allocations, I found an association between financial information and resource allocations. Additionally, financial information significantly impacted the performance evaluation of the agency director.An additional test of the importance of nonfinancial information in resource allocations involved resource scarcity. As discussed in the paper, I hypothesized that under scarcity nonfinancial information and financial information would become more important to the allocation process. My results indicated that nonfinancial information had no impact on allocation decisions made under scarcity. The association between financial information and resource allocations was opposite that predicted.