Abstract The article focuses on the practice of cost allocation by the managers and their decisions related to performance measurements. According to the author a major survey indicated that 40 percent of 594 companies calculated income for internal decision and control purposes consistent with the way it is calculated for external reporting. Practically all cost accounting textbooks recommend that a manager's evaluation should be confined to those aspects of performance that he can directly influence in the time period under consideration, this concept is called responsibility accounting. Here the author attempts to provide several possible explanations for why managers are evaluated on the basis of costs over which they exercise no direct control. His focus is on the controllability of costs and responsibility accounting rather than the issue of fixed versus variable costs. He examines rationales for basing the revenue department agent's compensation on those non-controllable service costs which are uncertain at the time of the contract.

Cost allocation, Noncontrollable cost allocation, Collusion, Performance evaluation

This paper analyzes how earnings and price are used in executive compensation contracts. Risk-averse shareholders collectively design a contract and individually trade in the stock market. In the optimal linear contract the use of earnings and price depends critically on incentive efficiency, i.e., how precisely the measures convey the true outcome. The relative weight of price to earnings exaggerates the true relative importance of price because price impounds traders' overall information while its informational value lies in the incremental information it provides. The use of price allows shareholders to share trading risks with managers.

Stewardship role, Accounting information systems, Management control, Value of information system

In our model risk-neutral shareholders need to motivate a manager to select among projects with different risks, and to work hard in implementing the chosen project. Curvature of the manager's compensation contract as a function of profit affects his attitude toward project risk. The optimal curvature depends on the trade-off between controlling project risk and motivating effort. The analysis predicts greater option-based compensation when there are desirable risky growth opportunities (proxied by Tobin's q or R&D expenditures) and less option compensation when there are effective monitoring institutions (such as outside directors and bank lenders).