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Management Accounting Section of the American Accounting Association

Journal of Management
Accounting Research

2003, Volume 15

Contents

Forum on Budgeting

Articles

Budgeting Research: Three Theoretical Perspectives and Criteria for Selective Integration

Mark A. Covaleski
University of Wisconsin-Madison

John H. Evans III
University of Pittsburgh

Joan L. Luft
Michigan State University

Michael D. Shields
Michigan State University

Abstract: Budgeting is one of the most extensively researched topics in management accounting and has been studied from the theoretical perspectives of economics, psychology, and sociology. Thus, budgeting offers opportunities for research that chooses between competing theories from these perspectives or combines theories from different perspectives if they are compatible, to create more complete and valid explanations of the causes and effects of budgeting practices. In the first part of the paper we analyze budgeting research in the three theoretical perspectives, focusing on important similarities and differences across perspectives with respect to the primary research question, levels of analysis, assumption about rationality and equilibrium, budgeting and non budgeting variables, and causal-model forms. In the last part of this paper we identify four interrelated criteria for selective integrative research and provide an example of using these criteria for research on participative budgeting.

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Budget-Based Contracts, Budget Levels, and Group Performances

Joseph G. Fisher
Indiana University

Sean A. Peffer
University of Kentucky

Geoffrey B. Sprinkle
Indiana University

Abstract: In this paper, we experimentally investigate the effects of budget-based contracts and budget levels (performance targets) on group performance. We compare a group piece-rate contract with two different specifications of a group budget-based contract: (1) a group budget-fixed contract that provides no remuneration for performance below the budget and a fixed bonus for performance meeting or exceeding the budget, and (2) a group budget-linear contract that provides no remuneration for performance below the budget, a fixed bonus once the budget is attained, plus a piece-rate for production in excess of the budget. We also assigned each group a budget level, set at 50 percent, 75 percent, or 100 percent of the group's performance capability. The results indicate that the group budget-linear contract led to significantly higher group performance than both the group budget-fixed contract and the group piece-rate contract. Additionally, the 75 percent budget level led to significantly higher group performance than both the 50 percent budget level and the 100 percent budget level. Finally, the variability in group performance was lowest under the group budget-linear contract and the 75 percent budget level. Collectively, these results demonstrate the efficacy of both certain types of budget-based contracts and "moderately" difficult budget goals in enhancing group performance. The results also suggest that both motivation and coordination (planning) can be enhanced by budget levels of moderate difficulty and group budget-linear contracts, as the group budget-linear contract and the 75 percent budget level not only led to the highest level of performance, but also led to the lowest variability in performance.

Keywords: budget-based contracts; budget levels (targets); group performance; performance variability

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Management Control Using Nonbinding Budgetary A nnouncements

Frederick W. Rankin
Washington University

Steven T. Schwartz
State University of New York at Binghamton

Richard A. Young
The Ohio State University

Abstract: We use an experiment to investigate the efficacy of a nonbinding budgetary announcement made by an owner in order to mitigate a management control problem induced by asymmetric information. The owner's announcement indicates how much funding she will provide for each possible cost report by the manager regarding an investment opportunity. The manager has private knowledge of the cost, incentive to overstate it, and the ability to do so undetected by the owner. The experiment consists of three treatments: (1) the owner fully commits to honor her announcement regarding how she will use the manager's cost report, (2) the owner makes no announcement at all, and (3) the owner makes a nonbinding announcement regarding how she will use the manager's cost report. The first two treatments establish empirical benchmarks to gauge the effectiveness of the nonbinding announcement. There are three main results. First, owners in the nonbinding announcement treatment significantly outperform those in the no-announcement treatment throughout the experiment. Second, owners appear to use the nonbinding announcement as a bluff in an attempt to convince managers that they will reject a profitable project more often than they intend. This strategy appears to be particularly effective for the owners in the first half of the experiment. Third, the difference in owner welfare between the nonbinding announcement and binding announcement treatments is much less than the prediction made from standard game-theoretic assumptions. The third result suggests that, to the extent that commitment is costly, an optimal control system might not employ commitment.

Keywords: capital budgeting; commitment; experiment

Data Availability: The data are available from the first author.

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Practice Developments in Budgeting: An Overview and Research Perspective

Stephen C. Hansen
The George Washington University

David T. Otley
Lancaster University

Wim A. Van der Stede
University of Southern California

Abstract: Practitioners in Europe and the U.S. recently have proposed two distinct approaches to address what they believe are shortcomings of traditional budgeting practices. One approach advocates improving the budgeting process and primarily focuses on the planning problems with budgeting. The other advocates abandoning the budget and primarily focuses on the performance evaluation problems with budgeting. This paper provides an overview and research perspective on these two recent developments. We discuss why practitioners have become dissatisfied with budgets, describe the two distinct approaches, place them in a research context, suggest insights that may aid the practitioners, and use the practitioner perspectives to identify fruitful areas for research.

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Performance Measurement and Reward Systems, Trust, and Strategic Change

Robert H. Chenhall
Kim Langfield-Smith
Monash University

Abstract: This study examines the extent to which a manufacturing company used performance measurement and a gain-sharing reward system to achieve strategic change over a 15-year period. The case examines the initial impact of the gain-sharing scheme in overcoming inherent hostility within the workforce, its continued success in gaining the cooperation of employees to work toward the successful implementation of strategic initiatives and, finally, its limitations in sustaining ongoing strategic change after a ten-year period of apparent success. The firm eventually adopted team-based structures to complement gain sharing and sustain commitment to strategic change.

We explain the apparent success of the gain-sharing scheme over the first ten-year period in terms of the role of organizational trust. Gain sharing is a mechanistic form of control system, and hence may be compatible with organizational trust. After this initial success, managers believed that the level of employee cooperation to sustain strategic change was insufficient to maintain high performance in an increasingly competitive environment. The firm then introduced team-based structures to enhance employee enthusiasm to work toward sustaining strategic change. The adoption of teams promotes personal trust and the sharing of values and goals. The team-based initiatives did not result in significant performance improvements. We attribute this result, in part, to the continued role of gain sharing, a mechanistic control, which inhibited the development of personal trust.

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Factor Choice Distortion under Cost-Based Reimbusement

John Christensen
University of Southern Denmark

Joel S. Demski
University of Florida

Abstract: We study a setting in which a firm faces commercial and cost-reimbursed products, and, following Rogerson (1992), examine the factor choice distortions that are induced by the cost-based reimbursement arrangement. The firm's technology is separable, which allows us to rationalize fully an ABC procedure (given constant returns to scale) and also allows us to document whether the distortions occur in the direct or indirect subcost functions. The location and magnitude of the distortions depend on the precise costing procedure, but the preference for an ABC versus traditional procedure is far more subtle. Absent constant returns, and (linear) accounting procedure invites factor distortions because of the cost-reimbursement feedback, but the economic impact of these distortions depends on the technology, the relative prices, and the costing procedure.

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Experimental Evidence on the Links among Monetary Incentives, Task Attractiveness, and Task Performance

Nicholas J. Fessler
Abilene Christian University

Abstract: This study reports the results of a laboratory experiment where subjects performed a complex task under two types of compensation contracts, fixed-wage and piece-rate. Additionally, all subjects evaluated the attractiveness of the task prior to learning how they would be compensated during the experiment, and after they performed the experimental task under their assigned compensation contract. The results show that when the task was originally perceived as being attractive, piece-rate compensation led to a significant reduction in the perceived attractiveness of the task and worsened task performance relative to fixed-wage compensation. When the task was originally perceived as being unattractive, the form of compensation did not affect perceptions of task attractiveness or task performance. However, these results did not hold for a second group of subjects who performed a less complex task.

Keywords: monetary incentives; task attractiveness; performance; task complexity.

Data Availability: Data gathered in this study are available from the author upon request.

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Transfer Pricing Based on Actual Cost

Savita A. Sahay
Baruch College of the City University of New York

Abstract: This paper analyzes a simple transfer-pricing policy based on the actual cost of production. I show that the performance of actual cost-based transfer pricing can be improved by using an additive markup above the unit production cost. I also show that the additive policy dominates an entire class of alternative markup policies, including the more common multiplicative policy, in which the transfer price is set at the actual cost plus a percentage markup. The optimal additive markup is shown to increase with increasing prices for the firm's product, and decrease with the cost of the supplying division's investment.

Keywords: transfer pricing; actual cost; markup; performance evaluation.

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An Empirical Investigation of the Performance Consequences of Nonfinancial Measures

Amal A. Said
University of Toledo

Hassan R. HassabElnaby
University of Toledo

Benson Wier
Virginia Commonwealth University

Abstract: Firms are increasingly implementing new performance measurement systems to track nonfinancial metrics such as customer and employee satisfaction, quality, market share, productivity, and innovation. This study examines the implications of nonfinancial performance measures included in compensation contracts on current and future performance. Contextual factors, environmental factors, and strategic plans vary across firms and, in turn, adopting appropriate nonfinancial measures determines the performance consequences of such measures. Our findings support the contention that firms that employ a combination of financial and nonfinancial performance measures have significantly higher mean levels of returns on assets and higher levels of market returns. Although we find evidence that the adoption of nonfinancial measures improves firms' current and future stock market performance, we find only partial support for accounting performance improvements. Overall, the results indicate that the association between the use of nonfinancial measures and firm performance is contingent on the firm's operational and competitive characteristics.

Data Availability: All data used in this study are available from public sources.

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Complementarity, Task Assignment, and Incentives

Li Zhang
University of California, Los Angeles

Abstract: This paper studies the effect of complementarity on task assignment decisions and the design of optimal incentives for employees in charge of multiple tasks. A principal hires two identical agents. Each agent performs two tasks involving complementarities when the tasks vary in the informativeness of their performance measures. The principal tension governing how tasks are assigned lies between the heterogeneity loss due to aggregate performance measures under broad task assignments and the resulting positive information externalities. Although the aggregate performance measures under broad task assignments preclude tailoring the strength of incentives to the nature of the task, these measures are more informative about agent efforts when tasks are complementary. This enhanced informativeness improves contracting efficiency by mitigating the implicit costs of the heterogeneity loss. The analysis applies not only to the task assignment decisions, but also more broadly to other organizational structure decisions.

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Management Accounting: A Personal History

Robert N. Anthony
Ross Graham Walker Professor of Management Control Emeritus

Excerpts from Introductory Note by Jacob B. Birnberg: Professor Robert Anthony received the 2003 Management Accounting Section's Lifetime Achievement Award at the Management Accounting Section's January 2003 Midyear Meeting. Although he was unable to attend in person, Professor Anthony prepared this paper for distribution at the meeting. As the paper's title indicates, it provides a history of management accounting from the perspective of one of its pioneers.

Professor Anthony was one of the leaders in the movement that shifted the emphasis from cost measurement for financial statement purposes to providing data useful to managers. As he puts it, the shift refocused the emphasis from record keeping to people. His prolific output of journal articles and textbooks continued to focus on making accounting data useful to managers in both for-profit and nonprofit organizations.

This personal history of Management Accounting will remind the reader of how many issues that we now take for granted are relatively recent innovations in our discipline. Many developments considered to be radical innovations have become part of the accepted core of our discipline, e.g., discounted cash flows.

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