|
Journal of Management
Accounting Research
2002, Volume 14
Contents
Forum on Capacity, Pricing, and Costing
A Critical Overview of the Use of Full-Cost Data
for Planning and Pricing
Ramji Balakrishnan
The University of Iowa
K. Sivaramakrishnan
Texas A&M University
Abstract: Surveys show that many firms use full cost to set prices. However, principles of relevant costing imply that product prices should be independent of how a firm allocates fixed manufacturing cost to products. Recent research tries to resolve this conflict between theory and practice by expanding the scope of the problem; pricing is only one part of the larger problem of determining which products to keep and which products to drop, how much capacity to install, and how to allocate available capacity among the products. An emerging view is that we must jointly consider the capacity-planning and product-pricing problems to clarify the role of full costing in these decisions. In this article, we provide a critical overview of the results from this research, highlight how a combination of analytic and numerical methods have contributed to our understanding, and suggest directions for future research.
Return to Top
The Adequacy of Full-Cost-Based Pricing Heuristics
Rajiv D. Banker
The University of Texas at Dallas
Stephen C. Hansen
University of California, Los Angeles
Introduction: We investigate the performance of a full-cost heuristic in a service setting. In our model, a service firm determines the amount of capacity, a price, and a price discount each period. Based upon the price, a stochastic number of customers will place service orders. If too many orders arrive in a period, the firm will offer a price discount to those customers willing to back order and accept service the next period. Even though the model is fairly simple, the optimal pricing, price discount, and capacity rules are complex and require extensive calculations. We examine how closely three distinct heuristics approximate the optimal performance. The best performing heuristic is a full-cost pricing rule based upon a constrained version of the firm's optimization program. It consists of setting a price using full costs plus an adjustment based upon the nonlinear elasticity of demand. In 500 random simulations our full-cost heuristic obtains 99.5 percent of the optimal performance. Preliminary analysis suggests that a modified full-cost heuristic may continue to do well in settings where interim demand information arrives after the capacity choice, but before the pricing choice. However, a modified full-cost heuristic may not perform well when capacity lasts several periods.
Return to Top
Capacity Planning and Pricing under Uncertainty
Robert F. Göx
University of Fribourg (Switzerland)
Abstract: This paper analyzes a capacity-planning and pricing problem of a monopolist facing uncertain demand. The model incorporates "soft" and "hard" capacity constraints (soft constraints can be relaxed at a cost while hard constraints cannot be relaxed) and demand uncertainty. The firm receives additional demand information within the planning horizon. The solution to the planning problem depends crucially on what is known about demand at the time of the capacity decision as well as the pricing decision. Historical acquisition costs of capacity are relevant for pricing whenever the same information is available for capacity planning and pricing. However, when the firm receives additional demand information before making the pricing decision, only marginal cost is relevant for pricing. Different types of capacity constraints (i.e., soft vs. hard) affect how much capacity the firm obtains, but not how the firm sets prices.
Return to Top
Product Costing and Pricing under Long-Term-Capacity Commitment
Rajiv D. Banker
The University of Texas at Dallas
Iny Hwang
The University of Texas at Dallas
Birendra K. Mishra
The University of Texas at Dallas
Abstract: We develop a model to analyze optimal product-costing and pricing decisions in a dynamic information environment under long-term-capacity commitment. The arrival of new information about demand and cost parameters each period makes the problem complex. The optimal prices and capacity choices in our model cannot be decoupled as in Banker and Hughes' (1994) single-period model.
The optimal prices are based on product costs that are adjusted each period to reflect changes in expected variable costs as well as utilization of fixed activity resources. The charge for each fixed resource is monotonically increasing in the expected demand for that resource in each state given the optimal capacity choice. The average optimal prices across periods and states are similar to Banker and Hughes' (1994) benchmark prices.
Finally, we investigate a two-period version of the model to explore the optimality of carrying idle capacity. The optimal product-cost charge for fixed capacity is strictly less in the first period than in the second period when the firm expects demand growth.
Keywords: product costing; fixed costs; pricing; capacity
Return to Top
The Relation between Efficient Risk-Sharing Arrangements and Firm Characteristics: Evidence from the Managed Care Industry
Andrew J. Leone
University of Rochester
Abstract: This study examines contracts between HMOs and Primary Care Physicians. These contracts represent one important component of HMOs' management control systems. I argue that HMOs design contracts to minimize agency costs that arise from the physician moral hazard problem. The agency costs and resulting HMO-physician payment arrangements depend on an HMO's organizational form, customer mix, and environment. Physicians can work as HMO employees or as independent contractors operating individually or in group practice. These features, together with the HMO ownership structure, determine the HMO's organizational form. The level of Medicare enrollment characterizes the HMO's customer mix. The empirical results presented in this study are generally consistent with the theory.
Keywords: moral hazard; agency costs; contracting; healthcare
Return to Top
Gaming Nonfinancial Performance Measures
Michael J. Smith
Duke University
Abstract: This multitask agency model examines the use of nonfinancial performance measures. The first effort affects only current-period profit. The second effort affects only customer satisfaction, which increases future profits. The third effort (shifting effort) simultaneously affects both performance measures, increasing one and decreasing the other. In some cases, shifting increases the principal's expected surplus. In others, the agent uses it to "arbitrage" the contract by shifting units into the more heavily weighted performance measure. Shifting's dual nature implies that it can either increase or decrease the incremental value of customer satisfaction as a performance measure. The optimal contract may entail a negative weight on customer satisfaction.
Return to Top
A Critique of Milgrom and Roberts' Treatment of Incentives
vs. Bureaucratic Controls in the British North American Fur Trade
Gary Spraakman
York University
Abstract: In their 1992 textbook, Economics, Organization and Management, Milgrom and Roberts used 19th century fur trading companies as examples of effective (the incentive-based North West Company) and ineffective (the bureaucratic-based Hudson's Bay Company) organizations. Findings from detailed examinations of both companies' archives suggest that Milgrom and Roberts were not completely accurate in their depictions of the two companies' incentives and bureaucratic controls. In response to complexities of intercontinental trade, both companies used bureaucratic controls for coordination as well as profit sharing to motivate senior managers. More generally, the findings raise questions about Milgrom and Roberts' relatively negative conclusions concerning the effectiveness of bureaucratic controls.
Return to Top
The Effects of Reputation and Ethics on Budgetary Slack
Douglas E. Stevens
Syracuse University
Abstract: This experimental study tests the effects on budgetary slack of two potential controls for opportunistic self-interest-reputation and ethics. I manipulate the level of information asymmetry between the subordinate and the superior regarding productive capability and measure the subordinate's reputation and ethical concerns regarding budgetary slack. In this setting, I examine how information asymmetry affects reputation and ethical concerns, and test the effects of these concerns on budgetary slack. Consistent with prior findings, subordinates restrict the slack in their budgets to well below the maximum under a slack-inducing pay scheme, even after five periods of experience. Budgetary slack is negatively associated with a measure of ethical responsibility from a pre-experiment personality questionnaire as well as reputation and ethical concerns expressed in an exit questionnaire. Subordinates express lower reputation concerns as information asymmetry regarding productive capability increases, thereby reducing the superior's ability to monitor the slack in their budget. Ethical concerns, however, are not diminished with increases in information asymmetry. These results suggest that reputation is a socially mediated control whereas ethics is an internally mediated control for opportunistic self-interest.
Keywords: participative budgeting; budgetary slack; information asymmetry; reputation; ethics
Data Availability: All data are available upon request from the author.
Return to Top
Management Control, Expectations, Common Knowledge, and Culture
Shyam Sunder
Yale University
Abstract: Control in organizations can be defined as "expectational" equilibrium, or correspondence between how the members of an organization behave and how others expect them to behave. Using a contract model of organizations as the base, we use human expectations, common knowledge, and culture to propose a theory of control. Changes in factor and product market conditions tend to disrupt control in organizations. Strategic management consists of continual monitoring and anticipation of market conditions, and redesign, negotiation, and implementation of contracts to restore and maintain the "expectational" equilibrium.
Keywords: management control; expectations; common knowledge; culture; organization.
Return to Top
Promotion and Performance Evaluation of Managerial Accountants
Benson Wier
Virginia Commonwealth University
Dan N. Stone
University of Kentucky
James E. Hunton
Bentley College
Abstract: Using survey, interview, and archival data, we investigate two questions related to managerial accountants' (MA) PE (performance evaluations) and promotion processes: (1) Are there "fast tracks" (i.e., positive serial dependencies) in promotions? (2) Are promotions primarily determined by within-rank comparisons (i.e., "relative" comparisons) or comparisons to standards (i.e., "absolute" evaluations)? The survey data (n = 101) suggest that lower- and higher-ranking MA have differing perceptions of PE and promotion processes. For example, lower-ranking MA generally believe in the existence of fast-track promotions while higher-ranking MA do not.
Twenty years of archival PE and promotion data (1976-1995) from 5,899 managerial accountants employed at 2,525 companies in three industries (publishing, paper, and chemical) do not support the existence of fast-track promotions; instead, the archival data suggest a negative correlation between time to promotion to senior and time to promotion to manager. In addition, these data suggest that comparisons to standards are the largest influence on promotions to manager, while within-rank comparisons are the largest influence on promotions to senior. We conclude by discussing the importance and limitations of our results.
Keywords: firm behavior (JEL: D21); personnel management (JEL: M12); job evaluations; managerial accounting; survival analysis
Data Availability: Due to confidentiality agreements imposed by the participating association, the data from this study are unavailable to other researchers.
Return to Top
|
