Journal of Management
Accounting Research

1990, Volume 2

Contents

• Contribution Margin Analysis: No Longer Relevant/Strategic Cost Management: The New Paradigm - Robert S. Kaplan, John K. Shank, Charles T. Horngren, Germain Boer, William L. Ferrara, and Michael A. Robinson
• The Case for Multiple Methods in Empirical Management Accounting Research (With an Illustration from Budget Setting) - Jacob G. Birnberg, Michael D. Shields, and S. Mark Young
• Budget Instrumentality, Participation and Organizational Effectiveness - Nissim Aranya
• Environmental and Organizational Factors Affecting Transfer Pricing: A Survey - Susan C. Borkowski
• Performance in a Budget-Based Control System: An Extended Expectancy Theory Model Approach - Leslie Kren
• A Vroom-Yetton Evaluation of Subordinate Participation in Budgetary Decision Making - William R. Pasewark and Robert B. Welker
• Improved Measures of Manufacturing Maintenance in a Capital Budgeting Context: An Application of Data Envelopment Analysis Efficiency Measures - Leslie D. Turner
• Intra-Firm Resource Allocation and Transfer Pricing Under Asymmetric Information: A Principal-Agent Analysis of Decentralized Decision-Making in a Multi-Division Firm - Jeffrey A. Yost
• A Review of Alfred Rappaport's Creating Shareholder Value - Harold Bierman, Jr.
• "Back to the Future:" A Retrospective View of J. Maurice Clark's Studies in the Economics of Overhead Costs - Werner G. Frank
• Robert N. Anthony, A Management Accounting Pioneer and Scholar - William J. Bruns, Jr.

Contribution Margin Analysis: No Longer Relevant/Strategic Cost Management: The New Paradigm

A panel presented at the 1989 Annual Meeting of the American Accounting Association.

The Case for Multiple Methods in Empirical Management Accounting Research (With an Illustration from Budget Setting)

Jacob G. Birnberg
University of Pittsburgh

Michael D. Shields
San Diego State University

S. Mark Young
University of Colorado at Boulder

Abstract: This paper identifies criteria for evaluating empirical research in management accounting. Using these criteria, the inherent strengths and weaknesses of field, laboratory and survey research methods are analyzed, and the potential for each method to contribute to the development of theories and policies regarding management accounting is compared. We conclude that since no research method dominates the others on all criteria, multiple research methods should be used to investigate management accounting phenomena. We advocate two variations of the multiple method approach. The first is to use more than one method to conduct a particular study. This allows researchers to assess the level of method variance in the results. The second occurs when individual researchers, each using different methods, perform a coordinated series of studies on a particular topic. Such collaboration can lead to more effective and efficient contributions to the literature. The history of empirical research on budget setting is presented to illustrate how the use of multiple methods has contributed to an increased understanding of this topic.

Budget Instrumentality, Participation and Organizational Effectiveness

Nissim Aranya
Tel Aviv University

Abstract: Budgets may be considered instrumental if reward allocation is based on budgetary performance. The present study examines the effects of budget instrumentality and budgetary participation on budgetary performance as well as job satisfaction in a large retail drug company. Regression analyses indicate that the interaction between instrumentality and participation affects both performance and satisfaction. The pattern of interaction differs from those found by previous studies: high performance and satisfaction are associated with low participation/high instrumentality and high participation/low instrumentality conditions. The paper suggests specific directions for the development of a more comprehensive interaction theory.

Environmental and Organizational Factors Affecting Transfer Pricing: A Survey

Susan C. Borkowski
LaSalle University

Abstract: Empirical research on transfer pricing has found a substantial difference between the actual methods used in practice and the methods discussed in the accounting literature. However, little explanation has been provided as to what influences the choice of the methods used in practice. The present research investigated the environmental and organizational factors influencing a firm's transfer pricing method choice. Data concerning transfer pricing policies and methods, as well as certain environmental and organizational characteristics, were gathered from manufacturing rims, and subsequently analyzed.

The findings indicate that the presence of certain variables, particularly market price, does not imply the use of the market price method. Firms are using cost-based methods even when a market price for the transferred good is available. The results support the contingency theory approach to accounting, in which firms choose a methods based on what is perceived as optimal in their particular situation. Other findings help resolve prior contradictory findings regarding firm size and the use and type of a bonus to proxy for performance evaluation measures.

Performance in a Budget-Based Control System: An Extended Expectancy Theory Model Approach

Leslie Kren
University of Miami

Abstract: This study formulates an extended expectancy model to provide a framework to study the effects of performance incentives and participation on individual performance in the organization. The extended expectancy model suggests that it may be inappropriate to view motivation as the most direct determinant of performance (as suggested by the expectancy model). Instead, it is proposed that motivation determines the commitment to performance goals while it is commitment to the goals themselves which acts to mobilize effort and increase persistence and thus is the most direct determinant of performance.

A laboratory experiment, in which student subjects played a business game on a personal computer, was used to study the relationships proposed in the paper.

In general, the validity of the extended expectancy model and the resulting hypotheses were empirically supported. The results suggest that subordinate performance will be maximized in settings in which difficult objectives are coupled with attempts to build high goal commitment.

A Vroom-Yetton Evaluation of Subordinate Participation in Budgetary Decision Making

William R. Pasewark
University of Houston

Robert B. Welker
Southern Illinois University at Carbondale

Abstract: This study utilizes the constructs of the Vroom-Yetton model (decision attributes, decision-making styles, and decision rules) to evaluate subordinate participation employed in budgeting decisions. Financial executives of large business organizations, who have significant involvement in budgetary decision making, were asked to recall both a successful and an unsuccessful budget decision. For each decision, they described the decision attributes existing at the time of the decision and indicated the degree of subordinate participation employed in the decision. A comparison of the executives' participative styles to the style recommended by the Vroom-Yetton model supported the use of high levels of participation to enhance the chance of successful budgetary decision making.

Improved Measures of Manufacturing Maintenance in a Capital Budgeting Context: An Application of Data Envelopment Analysis Efficiency Measures

Leslie D. Turner
Northern Kentucky University

The difficulty in planning and controlling maintenance performance is exacerbated by the lack of a sufficient method of measuring maintenance performance. In a study of maintenance control, Bullock stated [1979]:

Performance measurement implies that an assessment is made of either efficiency or effectiveness, or preferably both. A measure of efficiency relates inputs to outputs, and because of the absence of a readily available unit for measuring maintenance output, it is extremely difficult to arrive at a reliable index of overall maintenance efficiency. [113] (emphasis added)

Although control information may have been inherently part of overhead allocation rates, such information becomes less useful as the technological and economic business environment changes. Thus, a different approach to gaining information to plan and control service department expenditures is warranted. Of the possible types of service departments, maintenance and repairs departments may have the most significant effect on the producing departments.

A method of aggregating and summarizing data into a summary performance measure analogous to return on investment measures in profit centers would aid in maintenance planning and control decisions. As Bullock mentioned in the quote above, a reliable index of maintenance performance is needed. This study examines the use of Data Envelopment Analysis as a method of aggregating maintenance operating information into a single summary efficiency measure.

In many companies, historical standards are used to measure performance in maintenance. Bullock [1979] identified three types of indices based on standards: 1) percentage of jobs completed in relation to jobs scheduled, 2) percentage of actual hours worked to estimated work hours, and 3) actual hours worked as a percentage of estimated hours on closed jobs.

Through the use of such measures, management should control maintenance operations. Bullock [1979] described the optimal amount of maintenance as "that point where the total direct costs of maintenance, whether preventive or failure, and downtime are minimized assuming some acceptable level of effectiveness." [16].

Intra-Firm Resource Allocation and Transfer Pricing Under Asymmetric Information: A Principle-Agent Analysis of Decentralized Decision-Making in a Multi-Division Firm

Jeffrey A. Yost
University of Florida

Describing a transfer price which induces the divisions of a divisionalized firm to act in the firm's best interest has long been a problem in the accounting literature. This dissertation examines the equilibrium characteristics of decentralized decision-making so as to provide insights into the design of optimal transfer pricing systems. A two-agent principal-agent model is examined under a more restrictive definition of decentralization than normally used in the economics literature. Decentralized decision-making is possible if the optimal contracts defined by the principal-agent model do not require a center to which each division reports its private information. After observing private information, the agents decide upon actions which lead to the optimal firm-wide activity. Central management (the principal) plays a passive role of only offering contracts to the agents and rewarding the agent based on observed activity. The dissertation provides some interesting results as to optimal transfer pricing activity. It is shown that if communication is costless, centralized decision-making is always preferred to decentralized decision-making. Furthermore, the dissertation analyze how high the costs of communication need to be before decentralization is optimal.

The final, and most important, result shows that the intermediate product is always transferred at the optimal level, even under information asymmetry. In economic analysis under certainty all levels of activity are at the optimal level. To motivate economic agents in environments of informational asymmetries outputs are often set at less than efficient levels (second best solution). In this model, for total outputs of the two divisions, there were states of nature where the firm would produce at a less than optimal level; however, even with the informational asymmetry, the intermediate product is allocated between being sold in the market or used in production at an economically efficient level. This last result justifies the marginal cost transfer pricing construct normally found in the accounting literature.

A Review of Alfred Rappaport's Creating Shareholder Value

Harold Bierman, Jr.
Cornell University

Abstract:

This is an analysis and review of the book by Alfred Rappaport titled Creating Shareholder Value. The importance of the "Creating Shareholder Value" concept is that it reasserts the importance of the shareholder and the importance of Rappaport's book is that is argues that this concept "must emerge as the new standard for business performance..." The objectives of this review are to describe and evaluate Rappaport's positions, and to offer some ideas on the subject of creating shareholder value.

"Back to the Future:" A Retrospective View of J. Maurice Clark's Studies in the Economics of Overhead Costs

Werner G. Frank
University of Wisconsin-Madison

Abstract:

Several recent motion pictures depicted characters who were transported back to an earlier era. These characters encountered numerous instances where they were struck by an environment that did not contain the accoutrements of our contemporary era. On the other hand, they also experienced déjà vu, in which the earlier era seemed to contain all the essentials of life many years in the future.

The reader of J. M. Clark's 1923 book on overhead costs will almost certainly be in the latter situation. The very phrase, "different costs for different purposes," can be traced back to this book. It is, in fact, the title for a chapter which could be, with very minor changes in some terminology, the chapter on relevant costs for decision-making in the current edition of almost any managerial/cost accounting text on the market. One is struck with how many insights into basic managerial accounting issues this economist developed. Several of these are discussed in the following sections.

Robert N. Anthony, A Management Accounting Pioneer and Scholar

William J. Bruns, Jr.

Introduction irrelevant.