Budgeting, Participation process, Employee satisfaction, Performance evaluation

C-V-P Analysis, Cost-Value-Profit analysis, Uncertainty, Capital market equilibrium

Earnings, Industry communalities, Market effects

ABSTRACT: A principal-agent relation is analyzed where the agent chooses an unobservable effort level and an observable level of utilization of a resource supplied by the principal. When the agent has private information about the usefulness of the principal's resource, it is shown that the optimal compensation function must include the resource level as an argument. That is, some form of "cost allocation" appears to be part of the optimal solution to the principal's problem. Further analysis shows that standard cost allocation techniques (where the agent is allocated more costs if he or she uses more of the resource) may not be efficient in motivating the agent's choices. In some circumstances, it may be optimal to pay the agent more if he or she used more of the principal's resource.

[A principal-agent relation is analyzed where the agent chooses an unobservable effort level and an observable level of utilization of a resource supplied by the principal. When the agent has private information about the usefulness of the principal's resource, it is shown that the optimal compensation function must include the resource level as an argument. That is, some form of "cost allocation" appears to be part of the optimal solution to the principal's problem. Further analysis shows that standard cost allocation techniques (where the agent is allocated more costs if he or she uses more of the resource) may not be efficient in motivating the agent's choices. In some circumstances, it may be optimal to pay the agent more if he or she used more of the principal's resource.]

A variety of decision models for cost variance investigations have been suggested in the accounting literature. However, few of these models explicitly have recognized that users of these models seldom have perfect knowledge of the model parameters, particularly parameters such as the average cost when "out of control." In this paper, the issue of parameter uncertainty in cost control is addressed in two ways. First, the expected cost (or loss) arising from misestimating the parameters is estimated using two methods (numerical approximation and simulation). Then a model comparison scheme is introduced for using reported costs to make inferences about the parameters of the cost process, resulting in a "learning model" by which a manager may use an investigation to find out about the cost process, as well as to correct an out-of-control situation.

ABSTRACT: Most cost variance investigation models have considered only one cost process at a time. However, there are many reasons why cost variances from two cost processes may be correlated and why a model which exploits these commonalities may be expected to reduce expected costs. Such a model is described in this paper, and some examples are used to illustrate the effects of different factors on the cost savings.

The article presents a simulation analysis of alternative cost variance investigation models. In past some authors have suggested that the lack of application of more complex cost variance investigation models could be due either to management's lack of awareness or to the fact that the stochastic cost processes assumed by these models are not descriptive of processes which generate actual costs. Results of some studies made in this field indicate a number of other possibilities for the lack of application. A rational manager who is evaluated on the basis of his or her operating results or on the number of times he or she makes the budget may well prefer a naive cost investigation rule. More important, a manager who is concerned with all costs could very well prefer a less complex investigation rule. As a result, survey research, which seeks to determine the acceptance of the more sophisticated cost investigation models, also should determine the basis on which the decision-maker is evaluated and rewarded, since this will affect his or her model choice. These same considerations should be taken into account in the development of cost variance investigation models which employ more complex stochastic processes.

This article comments on the article "Cost of Information and Security Prices: Market Association Tests for Accounting Policy Decisions," by Robert G. May and Gary L. Sundem, published in the January 1973 issue of the journal "The Accounting Review." May and Sundem presented an analysis of the information set underlying a set of market-clearing security prices. The authors conclude that choosing between accounting alternatives on the basis of benefits and costs to society is a complicated procedure and that alternative accounting procedures may lead to alternative sets of market-clearing prices, so that the market association of an unreported accounting alternative may not reflect its actual information content. It is found that the conditions under which market association measures are valid are not as restricted as those found by May and Sundem. It was found that the conditions under which market association measures are valid are not as restricted as those found by May and Sundem. In cases where an unreported accounting alternative provides more timely information than the currently reported alternative, market associations are valid if they are measured over an appropriate time period.