Journal of Management
Accounting Research

1993, Volume 5

Contents

• Research Opportunities in Management Accounting - Robert S. Kaplan
• Economic Implications of Single Cost Driver Systems - Rajiv D. Banker and Gordon Potter
• Reporting Manufacturing Performance Measures to Workers: An Empirical Study - Rajiv D. Banker, Gordon Potter, and Roger G. Schroeder
• Accounting for Replacement Investments - Jonathan D. Bierman and Harold Bierman, Jr.
• What's New About Modern Manufacturing? Empirical Evidence on Manufacturing Cost Changes - Germain BÖer and Debra Jeter
• Information and Managers: A Field Study - William J. Bruns, Jr. and Sharon M. McKinnon
• Is Risk Preference Induction a Reliable Method of Controlling Risk Preferences? - Jean C. Cooper and Frank H. Selto
• Comment on "Is Risk Preference Induction a Reliable Method of Controlling Risk Preferences? - David E. Wallin
• Incentive Compensation Design, Strategic Business Unit Mission, and Competitive Strategy - Joseph Fisher and Vijay Govindarajan
• The Association Between Performance Plan Adoption and Corporate Capital Investment: A Note - Jennifer J. Gaver and Kenneth M. Gaver
• Cost Accounting's Role in Computer-Integrated Manufacturing: An Empirical Study - Darrel I. Gosse
• Heterogeneity Issues in Aggregated Costing Systems - Mahendra Gupta
• Product Cost Bias and Selection of an Allocation Base - Yuhchang Hwang, John Evans III, and Vishwanath Hedge
• The Constructive Approach in Management Accounting Research - Eero Kasanen, Kari Lukka and Arto Siitonen
• Antecedents and Consequences of Participative Budgeting: Evidence on the Effects of Asymmetrical Information - Michael D. Shields and S. Mark Young
• Investment Monitoring Systems, Abandonment of Capital Assets, and Firm Performance - Kimberly J. Smith
• Explaining Cross-Sectional Workgroup Performance Differences in a JIT Facility: A Critical Appraisal of a Field-Based Study - S. Mark Young and Frank H. Selto

Research Opportunities in Management Accounting

Robert S. Kaplan
Harvard Business School

Introduction: In this essay, I will offer some personal views on what I consider to be the more and less promising opportunities for research in management accounting. I will illustrate my views by emphasizing the areas in which I have had direct involvement, such as activity-based costing and performance measurement, and spend less time, except by brief references, to areas in which I have had less direct experience, such as research in management control systems or incentive compatibility. Also, I will comment on research methods that I have personally used at some time during the past couple of decades, but will not discuss research methods, such as surveys and controlled experiments, that I have not used. Thus, this essay contains personal observations on the research I consider most promising for management accounting, but is not intended as a comprehensive or objective review of all contemporary research in management accounting.

Economic Implications of Single Cost Driver Systems

Rajiv D. Banker
University of Minnesota

Gordon Potter
University of Minnesota

Abstract: We subject claims about the benefits of activity-based costing systems to the scrutiny of analytical models incorporating rational behavior by users of product costing systems. We find that a monopolist is almost always strictly better off using multiple cost drivers as in an activity-based costing (ABC) system even when the system makes measurement errors in assigning overhead costs to activities. More importantly, we show that this result replicates for firms competing in an oligopoly when the cost and demand parameters are in steady state. The firms are strictly better off using a direct labor based single cost driver (SCD) system, however, if the demand for the overcosted labor intensive product is expected to grow sufficiently relative to the demand for the undercosted setup intensive product. This suggests that, facing imperfect competition, it is sometimes optimal for firms to persist in using a single cost driver system rather than switching to an activity-based cost system.

Reporting Manufacturing Performance Measures to Workers: An Empirical Study

Rajiv D. Banker
University of Minnesota

Gordon Potter
University of Minnesota

Roger G. Schroeder
University of Minnesota

Abstract: Much management accounting research has focused on the provision of periodic, aggregated financial information to managers for planning and control. Recently, many firms have adopted just-in-time production, total quality management, and teamwork practices for their manufacturing operations. These new manufacturing practices rely on increased worker involvement in the control of all phases of manufacturing, with the expectation that such involvement will result in the identification of opportunities for process innovations and manufacturing performance improvements.

The central theme of this paper is that the adoption of the new manufacturing practices necessitates changes in performance reporting and control systems. Successful implementation of these practices requires the workers to identify ways to improve the manufacturing process, reduce defects and ensure that the manufacturing operations run efficiently. Reporting manufacturing performance information provides line personnel with the feedback that is necessary for learning and directs their efforts to productivity and quality improvements. Demand for shop floor performance reporting systems is therefore likely to be greater where these new manufacturing practices are employed.

Using a sample of 362 worker responses from 40 plants, we document that the reporting of manufacturing performance measures to line personnel is positively related to the implementation of just-in-time, teamwork, and total quality management practices. Worker morale is also found to be positively related to these new manufacturing practices and to the reporting of performance information. As such, the results provide evidence on the linkage between manufacturing practices and performance reporting systems.

Accounting for Replacement Investments

Jonathan D. Bierman
Tandem Computers Incorporated

Harold Bierman, Jr.
Cornell University

Abstract: The conventional accounting practice is to write off the cost of an asset and show a loss when it is replaced by a new asset and the asset's salvage value is less than the book value. This paper shows that this accounting practice is inconsistent with the economic analysis leading to the replacement decision, if the asset's economic value before the replacement is equal to or larger than the asset's book value. The paper's logic applies to any situation where currently used assets are being challenged by more efficient replacements.

What's New About Modern Manufacturing? Empirical Evidence on Manufacturing Cost Changes

Germain Böer
Vanderbilt University

Debra Jeter
Austin Peay State University

Abstract: Many writers on management accounting argue that labor is no longer a significant cost and that overhead is a growing and significant cost in manufacturing operations. This paper reports the results of an examination of material cost and labor cost data for a variety of manufacturing industries for the years 1899 through 1987.

This research suggests that, while labor as a percentage of sales reached a peak for many industries around 1950 and indeed declined subsequently to the point of becoming relatively insignificant for some industries, as late as 1987 labor cost represents a significant portion of total manufacturing cost for other industries. The argument that overhead is a growing portion of manufacturing cost is tested by examining the relation over time of the ratio of total wages and salaries to production wages. The trend indicates that for some industries overhead costs are rising while for others they remain relatively constant. In summary, it appears that manufacturing cost structures have been changing slowly over time, but sufficient variation across industries exists in the extent and nature of the changes to suggest that no single approach to structuring cost accounting systems is likely to be optimal for all industrial organizations or sectors.

Information and Managers: A Field Study

William J. Bruns, Jr.
Harvard Business School

Sharon M. McKinnon
Northeastern University

Abstract: A field study was undertaken to learn more about how managers use accounting information. Interviews revealed that managers are hungry for better information to support their work. Informal sources of information dominate other sources of information for day-to-day needs. Unit data is the metric which supports short term management, while financial information increases in importance as managers' horizons lengthen. Many managers develop their own personal systems for getting the information they want or believe they need. The most effective management accounting systems will support these systems rather than attempt to displace them.

Is Risk Preference Induction a Reliable Method of Controlling Risk Preferences?

Jean C. Cooper
University of Kentucky

Frank H. Selto
University of Colorado at Boulder

Abstract: Economic theory provides the theoretical support for many of the recent experiments studying budgeting and other management control techniques. An important assumption in many of these models specifies the risk preferences of principals and agents. In laboratory experiments, however, the measurement of risk preference has proved problematic. An alternative method, the Risk Preference Induction (RPI) technique [Berg et al., 1986], may provide a means to control risk preferences. The purpose of this study is to evaluate the RPI method, to suggest future research, and to raise issues that affect future uses of RPI in managerial accounting research. Our results indicate that RPI apparently worked better for risk-averse and risk-seeking attitudes than for risk-neutral attitudes, but the relationships among the lottery points and probabilities appear most critical to the induction's success - RPI appears to control all risk preferences except when choices are "close." Future research should subject RPI to more exploratory tests, some of which are outlined here.

Comment on: "Is Risk Preference Induction a Reliable Method of Controlling Risk Preference?"

David E. Wallin
The Ohio State University

Abstract: Issues regarding risk preferences, risk preferences measurement, and risk-preference manipulation pervade experimental and theoretical managerial accounting research. The area of risk-preference induction is one that receives much informal discussion, while deserving more formal investigation. Compound lotteries have been used in a number of studies (see Selto and Cooper [1990]). Yet, little exploration of the type undertaken here has been performed. Cooper and Selto [1993] ("the authors") should be commended for bringing this topic to the table once more. They have provided interesting insights into the use of compound lotteries to induce risk preferences. The majority of this discussion will center on two points: the effectiveness and efficiency of compound-lottery risk induction. With regard to efficiency, an alternative, simpler mechanism will be suggested that may match the performance of the authors' results. Some comments on general and specific smaller issues will be presented first. For the typical reasons, this analysis will center far more on the weaknesses of the paper rather than its strengths.

Incentive Compensation Design, Strategic Business Unit Mission, and Competitive Strategy

Joseph Fisher
Indiana University

Vijay Govindarajan
Dartmouth College

Abstract: Accounting research has often adopted a contingency approach to control system design. Previous research has hypothesized that strategic variables can affect control system design. This paper continues this stream by focusing on incentive compensation and examining its relationship to strategic business unit (SBU) mission and SBU competitive strategy. The SBU mission is captured by the build vs. harvest dichotomy while Porter's [1980] product differentiation vs. low cost model applies to competitive strategy. Univariate hypotheses are developed tying incentive compensation design to SBU mission and competitive strategy. Following Gresov [1989], this paper examines the potential conflicting contingencies when incentive compensation, mission and competitive strategy are examined simultaneously.

The Association Between Performance Plan Adoption and Corporate Capital Investment: A Note

Jennifer J. Gaver
The University of Georgia

Kenneth M. Gaver
The University of Georgia

Abstract: This study is a large sample replication of previous work by Larcker [1983], which investigates changes in corporate capital investment associated with the adoption of a performance plan. The sample consists of 204 firms that adopted performance plans between 1971 and 1980, and 204 nonadopting firms matched to experimental firms on the basis of industry membership. In contrast to Larcker's findings, which are based on 25 matched pairs of adopting and nonadopting firms, the results of this study provide little evidence that capital spending increases following adoption. Larcker also speculated that performance plans, as options on the firms' accounting results, encourage managers to pursue risky investment strategies. However, a significant decrease in average systematic risk (asset beta) following adoption is observed in this study. Relative to the original findings of Larcker, the results reported here are less supportive of the proposition that performance plans influence managerial decisions.

Cost Accounting's Role in Computer-Integrated Manufacturing: An Empirical Field Study

Darrel I. Gosse
Ball State University

Abstract: This paper reports the findings of a field study which compared cost accounting activities of four computer-integrated manufacturing (CIM) factories with four traditional manufacturing (TM) plants. The four CIM sites were selected for their CIM attributes: integrated functions and data systems, pull-through production control, reduced set-up times and costs, and application of advanced computer-aided engineering and manufacturing process technologies. The four TM sites were selected for their traditional manufacturing attributes: dedicated inflexible processes, costly set-ups, general purpose machinery, push-through production control. Research data were gathered from taped and transcribed interviews held with accounting, engineering, production, and plant management personnel. The study's results provide descriptive insights about the kinds of changes in cost accounting activities likely to occur where CIM is introduced to a TM plant. The findings suggest that CIM will move cost accounting into a new era of cost management emphasis, but the impact on formal cost accounting systems is likely to be gradual and lag behind the pace of change in engineering and production systems.

Heterogeneity Issues in Aggregated Costing Systems

Mahendra Gupta
Washington University

Abstract: Cost accounting systems have been repeatedly criticized for distortions in product cost measures brought about in part by methods of aggregation in the accumulation and allocation of costs. Most of the criticisms of aggregated costing systems are based on the widely held belief and common intuition that aggregations of heterogeneous sets of information distort inferences based on that aggregate information. In this paper, I analyze how the degree of heterogeneity in (i) products, (ii) allocation measures and (iii) products' resource usages across activities affect the costs allocated to products at different levels of aggregation. Empirical analyses of field data from the manufacturing facilities of two firms, one from the chemical industry and the other from the electronics industry find positive correlations between the degree of heterogeneity and the level of differences in costs allocated to products at different levels of aggregation.

Product Cost Bias and Selection of an Allocation Base

Yuhchang Hwang
The University of Pittsburgh

John H. Evans III
The University of Pittsburgh

Vishwanath G. Hedge
The University of Pittsburgh

Abstract: This paper constructs a model to explain the determinants of the extent of product cost bias which results when a firm employs a conventional two-stage overhead cost allocation system. The extent of product cost bias has previously been hypothesized to be a function of (1) production technology heterogeneity, (2) unit input costs, and (3) product mix. Our model provides an explicit framework within which to analyze such factors and their interactions. In particular, we derive an expression for the firm's economic loss from product cost distortion as a function of each product's squared bias and the extent of product market competition. In turn, the squared bias is shown to be a function of the heterogeneity of the production technology, unit input costs, and the product mix.

In addition, the paper uses the model described above to develop and evaluate algorithms which managers can use as practical guides in choosing the best allocation base at each overhead cost pool. Such algorithms are potentially valuable to firms in two ways. First, in designing the firm's cost system, particularly the overhead cost pool structure, the algorithms can help managers to quantify the magnitude of cost distortion induced by alternative allocation bases, thus allowing improved tradeoffs to be made. Second, once an overhead cost pool design has been chosen, the proposed algorithms can also be used in selecting the best allocation base at each cost pool.

The Constructive Approach in Management Accounting Research

Eero Kasanen
Helsinki School of Economics

Kari Lukka
Turku School of Economics and Business Administration

Arto Siitonen
University of Helsinki

Abstract: The constructive approach means problem solving through the construction of models, diagrams, plans, organizations, etc. This mode of research is widely used in technical sciences, mathematics, operations analysis, and clinical medicine. The doctrine of management accounting includes several important examples of managerial constructions, such as the ROI-measure in profit-center accounting or the DCF-techniques in capital budgeting. However, almost all of such constructions have been developed in companies or consulting bureaus. We argue that the constructive approach is used too scarcely in management accounting research. Our review of the accounting literature shows that surprisingly few of the most significant managerial constructions originate in management accounting research. Typically the academic literature has merely analyzed and interpreted the innovations constructed elsewhere after the fact. A potential explanation for this scarcity is the adoption of the scientific ideals of accounting either from the natural or social sciences. Another may be that the design of useful managerial constructions tends to result in a consulting relation between the research and the firm, which inherently limits the possibility of publishing the results. Also we argue that the constructive approach, grounded in management accounting theory and leading to working managerial constructions, satisfies the requirements of valid applied research. Thus, we propose the constructive approach as a significant option for management accounting researchers to enter the field of relevant and useful problem solving. This direction for research would be one potentially fruitful answer to the recent claims that management accounting has lost its relevance.

Antecedents and Consequences of Participative Budgeting: Evidence on the Effects of Asymmetrical Information

Michael D. Shields
San Diego State University

S. Mark Young
University of Southern California

Abstract: A review of empirical studies on participative budgeting indicates that most have focused on its consequences (e.g., attitude, motivation, performance, satisfaction) rather than its antecedents. We suggest that the mixed results of participative budgeting research are due to incomplete models of the process. Further, we propose that researchers develop theories that tie particular antecedents of participative budgeting to specific consequences. Next, we develop a model that uses information asymmetry between local and central management as the antecedent condition and link it to: (1) participation of local managers in setting their budgets, (2) budget-based incentives and (3) firm-wide performance. Data to test these relationships were gathered from corporate controllers of the Standard and Poor's 500, and the relationships were tested using path analysis. Three of the four hypotheses were supported-the effects of information asymmetry on participative budgeting, participative budgeting on budget-based incentives and the effect of budget-based incentives on firm-wide performance. The fourth hypotheses-the effects of information asymmetry on budget-based incentives was only marginally supported. We also propose three other possible antecedents of participative budgeting that can be investigated: (1) a desire to positively influence individual attitudes, behavior and performance, (2) to reinforce a particular culture, and (3) to provide a mechanism for organizational learning.

Investment Monitoring Systems, Abandonment of Capital Assets, and Firm Performance

Kimberly J. Smith
College of William and Mary

Abstract: Informational impediments and management conflicts of interest may result in dysfunctional abandonment decisions. An investment monitoring system is hypothesized to affect the relationship between abandonments and firm performance. Empirical tests provide evidence that this is indeed the case. Firms with an investment monitoring system exhibit a positive relationship between abandonments and performance, while firms without such a system exhibit a negative relationship. Further, these results are not driven by capital expenditure levels or industry membership. This study supports the importance of investment monitoring as a valuable management control mechanism.

Explaining Cross-Sectional Workgroup Performance Differences in a JIT Facility: A Critical Appraisal of a Field-Based Study

S. Mark Young
University of Southern California

Frank H. Selto
University of Colorado-Boulder

Introduction: Workgroup differences in performance is a topic of much interest to managers and researchers. This paper reports a field-based study of these differences for a single division of a facility that uses just-in-time (JIT) manufacturing. There were two stages to our study. The first was designed to link behavioral variables collected from direct laborers to performance measures assessed by the firm. In the second stage, these performance measures were used to explain variation in workgroup ratings, which are overall measures of workgroup performance.