Working Papers Abstracts

"A Note on the Roles of Aggregation and Delay in Management Control"

A. Nikias, SUNY-BInghamton
S. Schwartz, SUNY-Binghamton
R. Young, Ohio State University

Abstract:Accounting information is often produced in an aggregate format and is delayed in its arrival. This teaching note examines the effects of aggregation and delayed arrival in the context of management control. One might expect that a reduction of information about managerial performance would reduce the efficiency of incentive schemes designed to increase goal congruence within the firm. Contrary to this intuition, aggregation, which reduces information, in some circumstances increases the efficiency of incentive schemes. This potential improvement in efficiency results because under aggregation the superior can exploit the subordinate's uncertainty about his future compensation. However, the resultant information loss from aggregation is generally costly, and these costs may outweigh the benefits of aggregation. We further illustrate that delayed arrival of information may allow an owner to enjoy the benefits of aggregation without incurring its costs. The approach taken in this note is similar to Antle and Demski (1988) and Arya, Fellingham and Glover (1998), in that the discussion is centered on numerical examples and placed within the context of a simple model of management control that is accessible to upper level Undergraduate and Masters students. The advantage of this approach over having students go directly to the academic literature is that the simple linear structure of the illustrations facilitates construction and solution of numerical examples using spreadsheet analysis and also exposes the intuition more easily.

"Optimal Performance Measures with Task Complementarity"

A. Nikias, SUNY-BInghamton
S. Schwartz, SUNY-Binghamton
R. Young, Ohio State University

Abstract:This study examines optimal performance measures under moral hazard where a risk neutral agent with limited liability is assigned two interdependent tasks. Task interdependency, or complementarity, is captured by assuming that when the agent provides high effort on one task, it either increases or decreases the probability of success on a second task. Two performance measures are considered, disaggregate and aggregate. The relative benefit of aggregate performance measures derives from the agent's uncertainty about compensation when performing the second task. The relative benefit of disaggregate measures derives because it produces more information about the agent's actions on each task. The comparative advantage of aggregate measures is maximized for relatively independent tasks and diminishes with strong complementarity in either direction. Endogenous task assignment is then explored. The principal can bundle the two tasks together and assign them to a single agent, maintaining the effects of task complementarity, or unbundle the tasks and assign each to a different agent, eliminating the effect of task complementarity. The tendency to avoid negative task complementarity increases the conditional likelihood that the principal prefers aggregate performance measures.

"The Effect of Honesty Preferences and Superior Authority on Budget Proposals"

Frederick W. Rankin, Washington University
Steven T. Schwartz, SUNY-Binghamton
Richard Young, Ohio State University

Abstract:In participative budgeting settings, less informed superiors elicit information from privately informed subordinates. Hence, subordinates' honesty preferences should substantially enhance the efficiency of the budgeting process. In fact, recent research on budgeting suggests that subordinates may have economically significant preferences for honesty. Despite these findings, we argue that, for two reasons, it is difficult to determine the effect that honesty preferences have on subordinates' budget requests. First, existing research is unable to disentangle preferences for honesty from other non-pecuniary motives, such as preferences for fairness. Second, and possibly more important, most budgeting research on the role of honesty highlights the ethical dimension of budgeting. Ethical considerations are emphasized in these studies by granting subordinates discretion over the setting of the budget. In practice, superiors frequently have final authority over budget approval, which creates greater strategic interaction in the budgeting process. We design an experiment that allows us to disentangle honesty preferences from other nonpecuniary preferences. Our design also allows us to explore subordinates' reporting behavior when the superior has final authority over budget approval. We find an incremental effect of honesty when the subordinate dictates the budget, but find no incremental effect when the superior has final authority over budget approval. We conjecture, and provide some evidence, that this is due to subordinates framing the latter situation as one of strategic negotiation rather than as an ethical dilemma. This view, that budgeting is essentially devoid of ethical considerations, is consistent with some recent characterizations of budget practices.

"Using Activity Based Costing and Theory of Constraints to Enhance Decision Making at Duographics B.V.: A Case Study"

Philip G.M.C. Vergauwen, Universiteit Maastricht
Christian C.J.M.C. Kerckhoffs, Universiteit Maastricht

Abstract: This case focuses on the application of some straightforward management accounting techniques such as regression analysis, activity-based costing and the theory of constraints. The case can be used in intermediate and advanced management accounting courses and invites students to transform technical production data (process mapping) into data that can be used for activity-based cost calculations. Together with the main insights of the theory of constraints, these activity-based calculations lead to a more “managerial” income statement. Given the technical production data, students learn how to assess the possibilities to enhance decision making by transforming the ABC and TOC analysis into management information relevant for the assessment of the company’s profitability, for pricing and capacity utilisation decisions.

"The Ethics of Management Control Systems"

Josep M. Rosanas, IESE Business School
Manuel Velilla, IESE Business School

Abstract: In this paper we review the conventional analyses of management control systems, to conclude, first, that the "illusion of control" can mislead managers into believing that everything can be controlled and monitored, and , second, that no incentive system based only on extrinsic rewards can motivate individuals properly. Then, we investigate the philosophical foundations of the basic assumptions that, implicitly or explicitly, are made about the nature of the acting person. Based on personalist phenomenology, we show how the development of technical and moral values is crucial to the long-run survival of organizations. We end by offering some guidelines as to what control systems should be like in order to be compatible with the nature of human persons.

"The Effects of JIT and TQM Manufacturing Strategies and Non-financial Performance Measures on Firm Profitability"

Rosemary R. Fullerton, Utah State University
Cheryl S. McWatters, University of Alberta

Abstract:The manufacturing strategies of just-in-time (JIT) and total quality management (TQM), emphasizing lean production and continuous improvement, have been recognized as a source of strategic advantage. Increased profitability from the implementation of JIT and TQM practices is generally assumed, yet empirical studies that examine the direct relationship between these practices and firm profitability report mixed results. This study uses survey data from executives in 121 US manufacturing firms to explore the relationships between TQM, JIT, and non-financial performance measures with firm profitability. Regression results provide empirical evidence that investments in JIT and TQM, coupled with the complementary use of non-financial performance measurement tools, such as benchmarking and tracking manufacturing efficiency, contribute to higher financial performance.

"Supply Chain Factors That Influence the Size and Sales of Malaysian Manufacturing Companies"

S. Mahenthiran, Butler University
I. Rajamanoharan, University of Technology MARA-Malaysia
H. Puteh, University of Technology MARA-Malaysia

Abstract: This study uses Porter's (1985) value chain framework and selects the supply chain factors that influences a Small and Medium Enterprise's (SME) sales and size. A sample of Malaysian companies was surveyed, and support was found for production automation, quality and manufacturing research being at the core of a manufacturing strategy, as suggested by Hayes and Wheelwright (1984). Additionally, such a strategy has to be matched by strong supplier relations upstream and high-tech handling facilities downstream. It was not the Malay majority that received the government benefits, but the non-Malays that built strong supplier relationships. A finding that emphasizes the importance of governance factors such as the owner manager commitment to strengthening the supply chains of SMEs.

"Economic Aspects of Information Security: A New Research Agenda for Cyber Security"

Lawrence Gordon, University of Maryland
Martin Loeb, University of Maryland

Abstract: Information security breaches in organizations are common in the modern digital economy. What is uncommon though is the approach being taken by a new breed of researchers who are applying economic concepts to cyber security problems in the hope of ultimately preventing (or at least reducing) their occurrence. This new research agenda has important implications for organizations around the world. Drs. Lawrence A. Gordon (http://www.rhsmith.umd.edu/accounting/lgordon/) and Martin P. Loeb (http://www.rhsmith.umd.edu/accounting/mloeb/), along with other colleagues at the University of Maryland, are among the leading proponents of this new research agenda.

"Improving Corporate Governance with the Balanced Scorecard"

Robert S. Kaplan, Harvard Business School
Michael E. Nagal, Balanced Scorecard Collaborative

Abstract:The paper identifies and briefly discusses the following primary responsibilities of a corporate board of directors:

1. Approve and monitor the enterprise's strategy
2. Approve major financial decisions
3. Select the chief executive officer, evaluate the CEO and senior executive team, ensure executive succession plans
4. Provide counsel and support to the CEO
5. Ensure compliance

The paper argues that board members, burdened by limited time and limited information, can participate in a more effective and efficient governance process by implementing a three-part Balanced Scorecard program. The program starts with an enterprise scorecard enabling the board to become more informed about the enterprise's strategy so that it can perform better its five primary responsibilities. The board can also create a Board Scorecard, which defines its primary outcomes, board processes, and skills, information, and meeting dynamics for more effective governance. Finally, executive scorecards enable the Board to evaluate the performance of each senior executive and his or her succession plans.

"Time-Driven Activity-Based Costing"

Robert S. Kaplan, Harvard Business School
Steven R. Anderson, Acorn Systems, Inc.

Abstract: The traditional ABC model has been difficult for many organizations to implement because of the high costs incurred to interview and survey people for the initial ABC model, the use of subjective and costly-to-validate time allocations, and the difficulty of maintaining and updating the model as (i) processes and resource spending change, (ii) new activities are added, and (iii) increases occur in the diversity and complexity of individual orders, channels and customers.

Time-driven ABC requires estimates of only two parameters: (1) the unit cost of supplying capacity and (2) the time required to perform a transaction or an activity. A time-driven ABC model:

• can be estimated and installed quickly
• is easily updated to reflect changes in processes, order variety, and resource costs
• can be data fed from transactional ERP and CRM systems
• can be validated by direct observation of the model's estimates of unit times
• can scale easily to handle millions of transactions while still delivering fast processing times and real-time reporting
• explicitly incorporates resource capacity and highlights unused resource capacity for management action
• exploits time equations that incorporate variation in orders and customer behavior without expanding model complexity

The paper uses simple numerical examples to articulate the fundamentals of time-driven ABC and provides several examples of companies that have implemented the approach and enjoyed rapid and significant profit improvements.

"Organizational Culture and Performance Measurement Systems"

Jean-François Henri, Naval University

Abstract:The aim of this study is to articulate and test the relationships between organizational culture and two dimensions of performance measurement systems (PMS), namely the choice and use by top management teams of performance measures. Three specific research questions are investigated: (i) To what extent does organizational culture influence the choice and use of performance measures? (ii) What is the nature of the relationships between the choice of performance measures and their use by top management teams? (iii) To what extent is the relationship between organizational culture and the choice of performance measures mediated by the use of PMS? The model proposed encompasses the relationships between four uses (monitoring, strategic decision making, attention focusing, and legitimization), two parameters of choice (financial and nonfinancial measures), as well as one set of competing values reflected by organizational culture (control versus flexibility values). The results of a survey reveal that control/flexibility values are significant determinants of the use of PMS and an important trigger for the choice of nonfinancial measures. Furthermore, the findings suggest that specific performance measures are chosen for different purposes: financial measures are preferred for monitoring activities while nonfinancial measures are useful to focus organizational attention. Both types of performance measures are used to support strategic decision-making. This study contributes to the management accounting literature by distinguishing the choice and use aspects of PMS, and by examining the nature of the relationships between those two dimensions. Moreover, it highlights the influence of cultural factors on both dimensions of PMS.

"Cost System Design Parameters: A Comparative Study"

Pierre Mévellec, IAE-Université de Nantes

Abstract:For 10 years now, the ABC revolution is being broadcast in the industrialized countries. However, one has to admit, the diffusion of this new approach is slow and it is far from replacing the systems of direct costs in the Anglo-Saxon world and the full cost systems in France. This paper does not provide the reason for that phenomenon, but proposes a number of clues that allow us to characterize cost systems other than by simple acronyms, and helps to highlight the difficulties encountered by the firms wanting to implement an ABC system.

Keywords: ABC, Cost systems, system design

"Life Cycle Costing: A Relevant Tool for Sustainable Development?"

Pierre Mévellec, IAE-Université de Nantes

Abstract: The last few years have seen significant improvements in the concepts, methods and general approach to calculating costs. Although ABC remains the most well-known , it is not the only approach. The Japanese approach, known as Target Costing is also mobilising its share of attention, as is the functional analysis method initiated in the US. Finally, we must also make room for Strategic Cost Management. Regardless of which of these approaches we consider, it is always from the point of view of particular players whose intention is benefit from increased knowledge of costs in order to achieve increased control over their value chain and profit margins. This self-centred vision is also present in the PLC (Product Life Cycle costing or cost of the product life cycle) concept, which is firmly anchored in product marketing. We are of the opinion that this type of economic calculation no longer fits our current industrial systems. History has shown that each new type of organisation had to develop its economic management tools, incorporating elements from existing forms of organisation. In relation to existing forms of organisation, the network of organisations represents a growing complexity, necessitating even more complex costing and management methods than the recent innovations to which we have already referred. This is the challenge that the overall life cycle costing approach seeks to confront, in reconsidering time, space and the dialogue between cost and value embracing many issues linked to sustainable development.

Reflecting the developments in other areas of the life of organisations, such as quality and timeframe management, the economic movement currently underway cannot be reduced to its instrumental aspect. The toolbox, even new-and-improved to include innovations with catchy acronyms, can only act as a support for a renewed organisational analysis, opening the organisation to multiple and changing partners and asking the only worthwhile question: which value production are we involved in and in what conditions.

"Accounting in Partnerships"

Steven Huddart, Penn State University
Pierre Jinghong Liang, Carnegie Mellon University

Abstract: This paper offers a perspective on partner compensation schemes and the accounting information systems that support them. Our analysis focuses on one particular omnipresent size synergy, namely improved risk sharing. We consider sharing rules that are linear in the observable contracting variables under three information regimes. In the first-best case, perfect information about each partner's effort is contractible. Next, we consider the case where only firm output is contractible. In the final case, we assume that an exogenously-specified accounting system provides noisy signals of individual partner's efforts. In each case, the tension between the risk-sharing synergy and moral hazard determines firm size.

"Profit Sharing and Monitoring in Partnerships"

Steven Huddart, Penn State University
Pierre Jinghong Liang, Carnegie Mellon University

Abstract: We characterize optimal linear profit sharing contracts among identical risk-averse partners endowed with a risky and personally costly production technology. Since individual output is unobservable, partners shirk productive effort, which limits optimal partnership size. When partners are further endowed with a personally costly monitoring technology that provides contractible noisy signals about partners' productive efforts, partner draws may depend on these signals and firm output. However, partners also shirk the monitoring task, which limits optimal partnership size. In firms with many partners, improvements in joint surplus obtain when one partner specializes in monitoring, suggesting that task specialization emerges endogenously.

"Internal Accounting"

Emanuel Schwarz, San Francisco State University of Cincinnati

Abstract: New Internal Managerial Cost accounting structure.
Separation of Internal from External-Financial Accounting
Totally new classification of the Internal Accounting
These new classifications correspond to the Managerial Cost accounting reports.

"Budgetary Slack, Management Level, and Private Knowledge"

Jeffrey Hergert, University of Washington-Tacoma
D.J. Parker, University of Washington-Tacoma

Abstract: This research investigates the relationships between budgetary slack, management level, and private knowledge. A primary contribution is the introduction of management level as a budgeting behavior variable. The research setting is a single, large, high-technology manufacturing organization in the United States, offering an alternative to cross-sectional research methods.

An inverse relationship is found between budgetary slack and management level, indicating that higher / (lower) level managers create lower / (higher) levels of budgetary slack than do lower level managers. Post hoc methods indicate this relationship is of limited strength. A positive relationship is found between management level and private knowledge, demonstrating that as managers climb the organizational hierarchy, their perception of the amount of private knowledge they possess they believe is not known to their superiors or peers increases as well. Post hoc methods indicate this relationship is also of limited strength. Finally, the assumed positive relationship between private knowledge and budgetary slack (Low and Shaw, 1968; Schiff and Lewin, 1970; Onsi, 1973; Merchant, 1985; and Chow, et al., 1988) is not supported in this single, large, organizational setting.

"The Role of Business Unit Controllers in Organizational Design"

Michal Matejka, University of Southern California

Abstract: Business unit controllers have contradictory responsibilities. They facilitate corporate control by providing information to top management and at the same time support decision-making of local management. The relative emphasis on controllers' local as opposed to corporate responsibilities, which I refer to as controller autonomy, varies across business units. This study examines how controller autonomy is aligned with two organizational design choices: the emphasis on financial targets in managers' bonuses and decentralization. I collect survey data from 308 managers and controllers in 178 business units of seven firms and find that controller autonomy is associated negatively with the percentage of managers' bonus linked to financial targets and positively with decentralization. The findings imply that organizational design choices can have conflicting implications for the decision on controller autonomy. Moreover, the findings contribute to the debate about the value of private information, as they suggest that the decision-making benefits of private information dominate its control costs in a cross-sectional setting.

"On Testing the Economic Theory of Budgetary Slack"

Michal Matejka, University of Southern California

Abstract:

Economic theory predicts three prerequisites of slack: information asymmetry, the principal's commitment, and costly information systems. Prior empirical literature fails to examine the role of the latter two prerequisites in explaining budgetary slack. I test validity of all three theoretical prerequisites with survey data on budgetary targets of 107 business units. I find weak evidence that information asymmetry proxies relate to budgetary slack as predicted by the theory. I also find evidence consistent with the theory that commitment is a necessary condition for slack. Finally, I show that top management can endogenously reduce information asymmetry and budgetary slack by changing the emphasis on corporate control in responsibilities of business units controller. In line with the theory, increasing the emphasis on corporate control is associated with lower budgetary slack but also with lower contribution of controllers to local decision-making.

"The Effect of Centralization on Adoption and Implementation of Organizational Changes"

Michal Matejka, University of Southern California

Abstract: This study examines theoretically the effect of centralization on adoption and implementation of management accounting changes. Differences in firm behavior are explained by structural differences in the distance between the decision-maker approving or rejecting a change and lower levels affected by the change. Centralized organizations characterized by a high distance between the decision-maker and those affected by a change will optimally (i) adopt only major innovations and reject adoption of incremental changes, (ii) implement more often in a top-down manner disregarding local information.

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"Evidence of Choice Avoidance in Capital Investment Judgments"

Kim Sawers, University of California, Riverside

Abstract: High choice difficulty results in choice avoidance among non-professionals making personal decisions; however, it is unclear whether experienced managers would avoid choice in professional accounting decisions when they have decision tools at their disposal. This study examines whether increased choice difficulty increases negative affect in a managerial accounting decision and, as a result, increases the tendency of a manger to avoid choice even when analytical decision tools are used. In an experiment with one hundred twenty executives, participants in the high choice difficulty conditions report higher levels of negative affect and greater desire to postpone making the decision than participants in a control group. In addition, participants provided with a decision aid designed to help them use a more problem-focused coping strategy reported a lower desire to postpone making the decision than participants in the choice difficulty conditions without the remedy. The results of this study provide insight into the influences of choice difficulty and negative affect on manager's professional judgments and choices. In addition, it presents a practical remedy that can be utilized to help managers respond to negative affect.

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"Comparison of Discounted Cash Flow and Residual Income Methodologies: May the Short-Term Results Contain Biased Information for Management?"

Fabio Frezatti, University of São Paulo, Brazil

Abstract: Permanent valuation is a key issue for effective management from a global standpoint. Several methods are available, which focus on the entity's valuation in a direct or indirect way, and all of them have the same goal: manage value to improve stockholder's worth. Long-term drive is very important and it is critical to balance value goals (long-term issue) and the management results on a year-to-year basis (short and medium terms). In some cases, the tools available are efficient for long-term management but may present weaknesses for short-term control in the daily work. The opposite may also happen. Due to this fact, two meaningful valuation researchers' views were chosen in order to make a numerical comparison and identify what happens when managing the same organization but looking at the performance through different instruments. The objective is to use residual income, represented by EVA® , and discounted cash flow, first for valuation processes and later for periodic performance analysis. After a tentative numerical exercise, some simulations were realized, changing variables considered meaningful for the focus of this research. From a time frame perspective, computing results through residual income or discounted cash flow may be quite different what performance is concerned. What is the importance of the temporary differences? Periodic performance is a continuous activity, which requires a reliable set of data to cope with and guide decisions that provide benefits to company value. If different tools may produce different timing figures, the time frame must be understood. The simulation changes were chosen due to the link with operational decisions (sales price, operating expenses and bad debt provision), working capital (days receivables and inventories), long-term investment (capital budget decision), cost of capital and capital structure management (interest rate, stockholder and dividend polices). In accordance with the simulation considered in this paper, conclusions pointed to an equal perception of value obtained by the two methods. Nevertheless, some interesting timing differences in the results appeared when managing performance figures.

"Management Accounting Practices in Brazil: Clusters of Best Practices Profile"

Fabio Frezatti, University of São Paulo, Brazil

Abstract: In class, professors teach that companies must have resources that provide competitive advantages and are important factors for success. These resources are made up by a great variety of things, such as information systems, concepts of participation, models and organizational structures. Let us call them components of managerial practices. Each company may has characterized by a unique configuration of tools that can be recognized as the company profile. This paper presents an empirical analysis of the managerial practices of the medium and large-sized Brazilian companies' profile. The sampling process was designed on the basis of the probabilistic statistic rules, which allowed for the random extraction of the entities from a database with more than US$ 500 billion in annual revenues, highly representative of the local market. The analysis started by showing an inventory of the managerial components identified in the conceptual framework and the corresponding variables that characterize them. The specification of the managerial construct started the process with the identification of the elements of management accounting, provided by the stages defined by International Management Accounting Practice 1 (IMAP 1). The elements considered are: Structured costing system, Strategic planning and budget, Management reports, Waste reduction program, Formalized control procedures and Value management system. Thus, for each element, the variables of interest were identified according to different sources. In the Strategic planning and budget, for example, the variables considered were vision, mission, operational planning and scenarios. At this point, variable components were identified and they are the basis for the questionnaire. The sequence and prerequisite perspective of each component were considered to attribute weight to the component construct relationship due to the fact that the construct is crucial to understand the priorities and beliefs of management. It means that the conceptual framework defines some steps to build the tools and that there exists a "natural" sequence. After the field research, the statistic multivariate analysis provided conditions for identifying the five clusters of the whole group. The following step was to identify their specific characteristics. It is amazing that what should be considered a relatively homogeneous profile is in fact extremely heterogeneous and segmented in extremely different clusters, as a result of the needs perceived by each organization. Thus, clusters of the management accounting practices profile represent one significant effort in the attempt to classify the organizations. Consequently, as a sequence to this paper, a following step will be an attempt to associate the clusters with the level of success obtained by the entities.

"Market Value Computation for MVA Analysis in Brazil: A Challenge or Nightmare"

Fabio Frezatti, University of São Paulo, Brazil

Abstract: Market Value Added (MVA®) is slowly being adopted as long term financial metric for strategic approach and Market Value is a significant part of it. Actually, from the perspective of the managers, it is the less controllable portion. Performance metrics are never neutral from the perspective of the stakeholders. Rankings based on MVA may be less self-understandable than any other metric available due to a large number of possible criteria to be considered both in the accounting and the market value. As a consequence, company figures provided by any kind of analysis cannot be ingenuous propositions but must be strong outputs of models considering circumstances and different environments. The paper challenger treated the different criteria that could be applied in the MVA® analysis in order to cope with the linkage between stockholders and managers and solve some problems related to focus and priorities. In this sense, computation criteria discussion is fundamental to provide credibility for the hole system. Finally, can a comparison between different markets provide similar results? The analysis shows that some changes in the ranking profile may happen and it may be difficult to segregate the winners and losers in the value creator championship.

"The Management Team View and the Value Management Process: Association Analysis of Brazilian Public Companies"

Fabio Frezatti, University of São Paulo, Brazil

Abstract: This study investigates the relationship between the goodwill value enjoyed by Brazilian public companies and their ideas and opinions about value management. Two kinds of research are presented. The first is based on a questionnaire, whereas the other analyzes the quarterly MVA®¹ between 1995 and 1998. MVA® (Market Value Added)-that is, market value less capital invested-is chosen as the proxy measure for goodwill, and is computed according to Stewart's procedures, using market values (for prices) and book values (for capital invested). The main issues explored in this research are what companies think about value, how they apply the concept, and which tools they prefer in management accounting. The main findings show that three variables are significant for the companies that have improved their MVA® performance during the period under review.

¹MVA®, Market Value Added, is a Stern Stewart trademark.

"Motomart: Mixed Up Over Mixed Costs"

A.J. Cataldo, Oakland University
Buck Dillon, Oakland University

Abstract: This financial data/case was tested with students in introductory (undergraduate), intermediate (undergraduate) and MBA (graduate) managerial/cost accounting courses. They were provided with 60 months of match-pair data and required to apply high-low and regression techniques to separate mixed costs into their fixed and variable components.

This data is real and, unlike textbooks problems, there is no solution to the case. The retail automobile dealership was not developing accrual-based financial statements. Therefore, this case/data emphasizes the importance of accrual accounting and the matching principle - financial accounting concepts - in a managerial accounting application.

The same instructor and instructional approach was applied in all three cases, during the winter and fall 2002 semesters at Oakland University. The results for all three levels are provided and, as hypothesized, the intermediate (undergraduate) accounting majors, with their superior financial and managerial accounting "maturity," represented the most capable group in analyzing the financial information and reaching an appropriate conclusion.

"Benefits of Customer Profitability Analysis Reports in Repeated Budget Allocation Decision Making"

Eddy Cardinaels, K.U. Leuven
Filip Roodhoft, K.U. Leuven
Luk Warlop, K.U. Leuven

Abstract: We study how decision makers learn to improve performance across repeated budget allocation decisions. The costing system they use should be able to provide information that is of incremental value over mere outcome feedback and informal knowledge about customer's cost. We report an experiment demonstrating that customer profitability analysis (CPA) facilitates learning of the most appropriate allocation of a marketing budget among customers.

Results show that in a difficult learning environment, participants receiving CPA information made closer-to-optimal budget allocation decisions, resulting in higher cumulative profits compared to participants receiving traditional accounting reports. In easier learning environments, CPA yielded a smaller additional benefit over a traditional costing system combined with outcome feedback. Additional analyses show that CPA is superior because it enables decision makers to make more efficient use of a (hill climbing) heuristic for approaching the optimal allocation.

"Diagnostic Market Feedback Attenuates the Benefits of ABC for Competitive Price Setting in a Heterogeneous Market"

Eddy Cardinaels, K.U. Leuven
Filip Roodhoft, K.U. Leuven
Luk Warlop, K.U. Leuven

Abstract: Activity-Based Costing (ABC) is intended to assist managers to make better pricing decisions than those taken using traditional volume-based cost methods. The added value of ABC should be assessed against that of signals emanating from the competitive environment in which the firm operates. Prior research has often shown market-based information to be overwhelming, thereby calling into question the wisdom of investing in cost systems to better approximate actual costs. We compare experimentally the pricing decisions of decision makers in a price-competitive duopoly market, characterized by considerable heterogeneity in customer-serving costs. Our results show that the incremental value of ABC depends on the quality of market signals. Decision makers receiving uninformative feedback revert to costing data and ABC outperforms volume-based costing. The presence of a well-informed competitor attenuates but does not completely eliminate the value of ABC.

"The Effects of Task Outcome Feedback and Broad Domain Evaluation Experience on the Use of Unique Scorecard Measures"

Monte Swain, Brigham Young University
Kip Krumweide, Brigham Young University
Dennis Eggett, Brigham Young University

Abstract: Lipe and Salterio (2000) find that division evaluators using balanced scorecards in a performance evaluation process relied almost solely on common measures and virtually ignored unique measures. Our study involving executives with varying levels of prior evaluation experience examines two factors that may lead to increased use of unique measures: task outcome feedback and broad domain evaluation experience. Results provide strong evidence of increased reliance on unique measures as evaluators receive outcome feedback on the impact of measures over multiple periods. Further, results also indicate that unique measures are used more over time when the prior general evaluation experience of the participants is relatively high.

"Avoiding Accounting Fixation: Determinants of Cognitive Adaptation to Differences in Accounting Method"

Michael D. Shields, Michigan State University
David T. Dearman, University of Arkansas at Fort Smith

Abstract: Much research over the last 30 years has provided evidence that individuals display accounting fixation; that is, their cognitive processes do not appropriately result in different decisions in response to cross-sectional or temporal differences in an accounting method. This study presents the results of a quasi-experimental test of the hypothesis that cognitive adaptation to a change in accounting method is a positive ordinal interactive function of three person characteristics: relevant accounting knowledge, general problem-solving ability, and intrinsic motivation to make appropriate decisions. Based on a product-pricing task in which subjects are provided with product costs reported by two product cost accounting systems (an activity-based costing (ABC) system and a volume-based costing system) results show that the majority of subjects did not change their cognitive behavior when there was a change in the cost accounting system and that those subjects who did appropriately adapt to that change in accounting method, and thus avoided accounting fixation, did so by debiasing costs reported by the volume-based costing system but not the ABC system. Furthermore, these adapters exhibited high values for all three of the person characteristics, as predicted.

Key words: Accounting fixation, accounting knowledge, intrinsic motivation, judgment and decision-making, problem-solving ability.