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Abstract:
This paper provides a summary graphic representation (maps) of the theory-consistent evidence about the causes and effects of management accounting, as presented in 275 articles published in six leading journals. The maps highlight connections and disconnects in the diverse streams of management accounting literature, in terms of what has been researched, the direction and shape of the explanatory links proposed, and the levels of analysis. Some of these connections and disconnects seem likely to be artifacts of the historical development of management accounting research, while others are more consistent with the natural links around and within management accounting. Based on criteria from social-science research, we offer 17 guidelines to help future research capture natural connections, avoid artifactual connections, and develop a more complete and valid map of the causes and effects of management accounting.

managerial accounting

Abstract:
Performance-measure weights for incentive compensation are often determined subjectively. Determining these weights is a cognitively difficult task, and archival research shows that observed performance-measure weights are only partially consistent with the predictions of agency theory. Ittner, Larcker and Meyer (2003) have concluded that psychology theory can help to explain such inconsistencies. In an experimental setting based on Feltham and Xie (1994), we use psychology theories of reasoning to predict distinctive patterns of similarity and difference between optimal and actual subjective performance-measure weights. The following predictions are supported. First, most individuals in our setting use the measures' error variance (precision) and error covariance to determine performance-measure weights. Second, directional errors in the use of these measurement attributes are relatively frequent, resulting in a mean under-reaction to the accounting-method change. Third, individuals seem insufficiently aware that a change in the accounting for one measure has spillover effects on the optimal weighting of the other measure in a two-measure incentive system, and in consequence, they make performance-measure weighting choices that are likely to result in misallocations of agent effort.

Decision performance, incentive compensation, mental models, performance measures

Abstract:
Errors in estimated product costs often lead firms to win business that is unprofitable, because firms are more likely to win business when underestimated product costs lead them to bid below actual cost (Cooper et al. 1992; Stalk and Lachenauer 2004; Hilton 2005). Feedback from repeated competitive bidding markets can teach people to bid well above estimated costs to avoid this winners' curse (Kagel 1995; Kagel and Levin 2002). We present experimental evidence that such learning is substantially hampered by managers' sense of responsibility for the costs. We hypothesize and find that, compared to bidders who are assigned cost-management initiatives for the firms they control, bidders who select their own initiatives bid more aggressively, lose more money, and learn less from market experience than bidders who are not responsible for choosing cost-management initiatives. This effect is consistent with psychological evidence that people tend to attribute bad outcomes to environmental factors out of their control, such as cost estimation errors, and attribute good outcomes to their own skills, such as their ability to choose effective cost management initiatives (Miller and Ross 1975; Zuckerman 1979). The results suggest that there are benefits to separating responsibilities for cost management and pricing in firms where accurate cost estimation is difficult.

Winner's curse, auctions, behavioral economics, cost accounting, laboratory experiment

Abstract:
Managers often make judgments about cost-driver and profit-driver relations using subjective analysis rather than statistical analysis of accounting data. We show experimentally that, even when the strength and temporal contiguity of the relation between financial performance and its driver are held constant, the prediction task is relatively simple, and individuals have relevant training and experience, individuals' differing mental representations of the cost-driver and profit-driver relations result in significantly different judgment accuracy. In our setting, judgment accuracy is higher when performance is measured as cost rather than profit. Accuracy tends to be higher for more direct relations, and individuals mentally represent the cost-driver relation in our experimental task as a more direct causal chain than the profit-driver relation. We present supplementary evidence supporting the theory that accounting prompts individuals to adopt cause-and-effect mental representations of varying directness between performance measures, rather than attending only to the sign and strength of the relation. Thus, an important consideration in the choice of performance measures should be cognitive properties as well as statistical properties of the measures - in particular, the directness of the cause-and-effect mental representation that the performance measures prompt. Additional evidence shows that individuals are relatively effective at learning that relations between performance measures are nonlinear, but they have difficulty accurately estimating the parameters of the relations.

Performance measurement, Judgment performance, Causal relations, Nonlinearity

Abstract:
Capital rationing, a widely used mechanism for controlling agency costs in budgeting, can take either competitive or noncompetitive forms. Accounting research has mostly addressed the non-competitive form, but competitive rationing is common in organizations. To examine effects of competitive rationing we conduct an experiment in which a principal allocates capital among three agents, who can each propose a single project. In the high (medium, low) competition condition, principals have sufficient funds to accept only one (only two, all three) projects. Prior literature provides three competing predictions about the effects of increasing competition in this setting. (1) Agents will make maximum credible misrepresentations under both medium and high competition to maximize their chance of receiving capital. (2) Agents will weigh the utility of honesty against the utility of receiving project funding, resulting in more misrepresentation at medium than at high levels of competition. (3) Misrepresentation will be highest in high competition, because agents will interpret the high-competition setting as one in which misrepresentation is most necessary or socially appropriate and honesty is least likely to be successful. We find that misrepresentation is highest in medium competition. In high competition, agents whose projects have low expected revenues are more likely to drop out of the competition by reporting relatively honestly.

capital rationing, budgeting, competition

Abstract:
Managers often make judgments about cost-driver and profit-driver relations using subjective analysis rather than statistical analysis of accounting data. We provide theory-consistent experiment evidence that, even when the strength and temporal contiguity of the relation between financial performance and its driver are held constant, the prediction task is relatively simple, and individuals have relevant training and experience, individuals' differing mental representations of the cost-driver and profit-driver relations result in significantly different judgment accuracy. In the experimental setting in this study, judgment accuracy is higher when performance is measured as cost rather than profit. Judgment accuracy tends to be higher for more direct relations, and individuals mentally represent the cost-driver relation in the experimental task as a more direct causal chain than the profit-driver relation. We present supplementary evidence supporting the theory that accounting prompts individuals to adopt cause-and-effect mental representations of varying directness between performance measures, rather than attending only to the sign and strength of the relation. Thus, an important consideration in the choice of performance measures should be cognitive properties as well as statistical properties of the measures - in particular, the directness of the cause-and-effect mental representation that the performance measures prompt.

Performance measurement, Judgment performance, Causal relations, Nonlinearity

Abstract:
We provide a discussion of three of Zimmerman's (2001) conjectures about, and prescriptions for improving, the current unsatisfactory state of empirical management accounting research: its focus on describing practice instead of testing theories; its focus on decision making instead of control; and reliance on social sciences other than economics. We suggest that these conjectures are based on inaccurate descriptions of current empirical management accounting research and the prescriptions offer potentially misleading guidance for future research. In contrast to Zimmerman (2001), we believe that the current research is guided by theory from a variety of social sciences (primarily economics, psychology, and sociology) and that this diversity is appropriate for the applied field of management accounting. We argue that while economics provides a good basis for much empirical research in management accounting, other social sciences offer more potential to explain important features of management accounting such as understanding people's preferences, how they think, how they interact with other people, and the process of change. Our conclusion is that empirical management accounting research will be better off if it appeals less to disciplinary identity and instead uses a variety of theoretical frameworks from the social sciences to provide more complete explanations of management accounting practice.

Abstract:
The relation of competition and cost accounting has been the subject of conflicting prescriptions, theories, and empirical evidence. Practitioner literature and textbooks argue that higher competition generally requires more accurate product costing. Theoretical economic analysis, in contrast, predicts that the optimal level of product-costing accuracy is sometimes higher at lower levels of competition. Results of survey research are inconsistent, suggesting a need for further identification of conditions under which higher competition leads to more accurate product costing. This study shows experimentally that individuals' choices of the level of product-costing accuracy depend not only on the current level of competition but also on the previous level of competition-that is, on an interaction between market structure (monopoly, duopoly, and four-firm competition) and market history (increasing versus decreasing competition). In the experiment, subjects decide on the quantity of data to collect at a pre-set price per datum to support more accurate product-cost estimates. Subjects collect the most cost data (i.e., choose the most accurate product costing) in monopoly, collect the least in duopoly, and an intermediate amount in the four-firm market, consistent with the pattern of optimal cost-data collection in Hansen's (1998) model. The process of convergence to the optimum differs significantly across market types and market histories, however. Subjects who begin with four-firm competition adapt more successfully to change than those who begin in monopoly. The lowest levels of decision performance occur when ex-monopolists face their first competitor: they overreact to this first encounter with competition and overspend on cost data.

competition, cost accounting, learning, decision-making

Abstract:
This paper experimentally investigates the effect of changes in product-market competition on changes in decisions about the accuracy of product costing. In repeated independent trials, subjects decide on the quantity of data to collect at a pre-set price per datum to support more accurate product-cost estimates. In the increasing-competition condition, subjects begin as monopolists and face first one new entrant and then two additional entrants in the market. In the decreasing-competition condition, subjects begin in a four-firm market from which two firms and then the third firm exit. Subjects collect the most data to support product-cost estimates in monopoly, least in duopoly, and an intermediate amount in the four-firm market, consistent with the pattern of optimal cost-data collection in Hansen's (1998) model. The process of convergence to the optimum differs significantly across market types and market histories, however. Subjects who begin with four-firm competition and end in monopoly make more nearly optimal decisions than those who begin in monopoly and end in the four-firm market. The lowest levels of decision performance occur when ex-monopolists face their first competitor: they overreact to this first encounter with competition and overspend on cost data.

Abstract:
This study shows experimentally that when individuals use information on intangibles expenditures to predict future profits, expensing (versus capitalizing) the expenditures significantly reduces the accuracy, consistency, consensus, and self-insight of individuals' subjective profit predictions. The experimental design allows us to eliminate several competing explanations for this apparent fixation on accounting. Subjects do not base their judgments on a naive prior belief that expensing precludes effects on future profits: a pre-experiment question shows that subjects expect intangibles expenditures will affect future profits even when expensed. Moreover, subjects do not lack, or fail to use, data that would allow them to learn the exact expenditure-profit relation. They receive data on intangibles expenditures and profits as a basis for learning, and in some respects the learning is quite successful even when intangibles are expensed: subjects' profit predictions accurately reflect the mean and standard deviation of actual profits. Nevertheless, consistent with psychological theories of learning, subjects do not learn the exact magnitude of the effect of intangibles on future profits as well when the intangibles are expensed. Although the mean of their predictions is accurate, they do not discriminate well between cases with high and low actual profits. In consequence, their prediction accuracy, consistency, consensus, and self-insight are lower when intangibles are expensed. Thus in this case, learning does not mitigate fixation on accounting, because accounting affects the learning process itself.

Accounting choice; Intangibles; Learning; Profit prediction

Abstract:
Efficient contracting involves reducing the losses in wealth due to bargaining impasses, time and effort spent in negotiating, delays in implementing profitable projects, and second-best agreements. Properties of accounting systems play a significant role when bargainers haggle over accounting-based payoffs. This paper shows that bilateral bargaining requires more time and generates more reported subjective disutility when the accounting information used in contracting creates greater uncertainty about payoffs. We develop an argument linking accounting-based common uncertainty to the information asymmetry about bargainers' payoffs that drives bargaining costs. We also distinguish between two kinds of uncertainty: first-order uncertainty or simple risk (uncertainty about outcomes) and second-order uncertainty (uncertainty about probability distributions of outcomes). In an experimental setting, we show that the presence of second-order uncertainty increases bargaining costs, holding first-order uncertainty constant at a moderately high level. We also find that bargainers whose payoffs are affected by second-order uncertainty demand and receive a higher premium than bargainers whose payoffs are affected by simple risk only.