Reviews the book "Accounting History 1976-1986: An Anthology," edited by Peter Boys and John Freear.

[Cost allocation is a pervasive practice in accounting. Horngren and Foster (1987, 411) define it as "the assignment and reassignment of a cost or group of costs to one or more cost objectives." An important form of cost allocation is the apportionment of corporate-level costs to various decentralized profit centers. The reason usually given for this procedure is that it is "a major means of getting subordinates to behave as desired by top managers" (1987, 422). Although such allocations have been criticized in the agency literature (Demski 1981) as being irrelevant for motivating managers in the presence of compensation contracts, this article identifies a precise role for indirect cost allocations, in conjunction with other instruments such as participative budgets, in settings with multiple divisions. A survey by Fremgen and Liao (1981) showed that 84 percent of firms allocated at least part of their indirect costs to their profit centers, and 80 percent did so for the purpose of evaluating the performance of profit center managers. The major aim was to remind managers that indirect costs exist and that at least a portion of these costs had to be covered by profit center earnings. Further, Atkinson's (1987) poll reported that the primary objectives of allocating indirect costs were the motivation of employees and the provision of signals for resource allocation. There has been little analytical work, however, on the economic role played by cost allocation systems. Demski (1981) claims that allocation mechanisms are useful only if they provide additional information that can be contracted upon. Similarly, Baiman and Noel (1985) show that in certain multiperiod settings, it is optimal to compensate an agent on the basis of prior periods' realizations of costs that were not in the agent's control, provided these costs affect the principal's capacity decisions. Magee (1988) identifies conditions under which an agent is compensated according to the usage of some resource, in addition to output. The agency studies described above cannot address cost allocations across operating units since they do not model multiple productive divisions among which common costs are to be allocated. Further, because they model single-agent settings, the second-best incentive schemes they derive suffice to motivate managers efficiently; thus, there is no role for allocations unless they provide additional information to the owner. With multiple divisions, however, simple compensation contracts do not provide adequate incentives to guarantee the owner's desired outcome. The role for allocations, over and above that of second-best contracts, in providing assurance to the owner is demonstrated here with a one-period model of an entrepreneur who incurs fixed costs in the production of different products by two workers. When the workers have correlated private information about the productivity of a common, central resource, the entrepreneur may fail to recover the fixed costs because the optimal payment schedules encourage the workers to misreport the productivity of the resource. By asking each worker to submit a budget to determine overhead rates, and by evaluating managers on their divisional profit after allocation of overhead costs, the entrepreneur can obtain the second-best return on the fixed investment. This mechanism is then compared to allocation systems observed empirically and to those recommended in the accounting literature. The mechanism design approach pursued in this paper, with the game itself a variable, enables the study of procedures by which accounting numbers are derived for purposes of performance evaluation. The accounting system is not imposed as a monitor or source of information; its value arises from its procedures, which enable the owner to play off the managers' private information against each other to guarantee a second-best return on investment. In the absence of such a system, the division managers would gain from implicitly colluding in their use of the central resource. The allocation scheme coordinates their actions and induces them to act in the manner desired by the owner. This positive role for the allocation of indirect costs in conjunction with the budgetary process emphasizes the value of a cost allocation system as a set of linked motivational devices.]

[Prediction is one of the most important aspects of investment decision making. This study provides evidence that investors' predictive earnings judgments can be systematically influenced as a consequence of the combined effects of "output interference" and "availability," and that the use of financial accounting information in the prediction process seems to provide limited benefit in terms of reducing this effect. Output interference is a psychological concept that implies that whatever is thought about first interferes with, and thus inhibits, later thoughts about an issue. An availability-based prediction strategy is one in which the decision maker uses the relative number of pro versus con reasons generated, and/or the ease with which such reasons can be generated, as cues in judging the likelihood of future events. Fifty-eight investors participated in an experiment that demonstrated that the order in which they considered opposing arguments regarding the possibility of reaching a specified level of earnings had an impact on both their ability to generate supporting and opposing reasons and their subsequent probability judgment that earnings would actually reach the specified level. The outcome for which the investors were able to generate the most supporting reasons was judged more probable. Investors were able to think of more reasons supporting a particular outcome, not because there were more such reasons in the objective environment, but rather as a consequence of output interference. The systematic effect on judgment, although perhaps slightly reduced, persisted when investors had access to financial statements while considering the company's earnings prospects.]

Choices of accounting techniques, as well as evaluations of accounting numbers, are based in part upon a knowledge of the relative profit patterns associated with alternative techniques. It is generally understood that inflation accounting models change profit patterns, and the general effects of changes from historical cost accounting to various inflation accounting models have been analyzed. In addition to these general effects, however, there are specific effects due to the interactions of conventional accounting techniques (such as LIFO and FIFO) and specific inflation accounting models. This study analyzes the interaction effects of conventional inventory accounting methods and several inflation accounting models to demonstrate that these effects can produce significant and non-intuitive changes in relative profit patterns among alternative accounting techniques.

Reviews the book "Strategic Planning Systems," by Peter Lorange and Richard F. Vancil.

The article presents the author's reply to Professor R.M. Piper's comments on his paper "A Note on the Joint Variance." Piper raises the question of whether the three-variance method should be taught at all. The value of bringing the joint variance into classroom discussions of variance analysis is twofold. First, there are a number of possible treatments of this variance, and consideration of these alternatives is impossible without its explicit recognition. According to Piper, since the joint variance cannot be controlled by a single manager, it should not be assigned to any single manager. However, such treatment of the joint variance requires its recognition and separation. Thus, Piper himself seems to provide the requested rationalization for the three-variance analysis. The second reason for discussing the joint variance is so that students will recognize that the two-variance method commonly used and taught implicitly treats the joint variance as part of the price variance. This recognition may also help students remember that the multiplier of the price variance is actual quantity while the multiplier of the quantity variance is standard price, as opposed to alternative combinations.

Present value depreciation has been explored in the literature as a means of reconciling the conflict between the internal rate of return of capital budgeting models (IRR) and the return on investment computed from financial statement data (ROI). Accounting accruals of cash flows confound the use of present value depreciation for this purpose, and a number of writers have suggested ways of recording accruals that yield to IRR-ROI consistency. This paper examines further the problems created by accounting accruals. The analysis shows that with the accruals required by the complete disaggregation of a project's net cash flows, IRR-ROI consistency often may be obtainable only at the cost of producing individual account balances that lack suitable economic interpretations.

The discounted present value concept plays an important part in accounting theory, often being viewed as the ideal concept of value. There is, though, a school of thought which, while recognizing the importance of the concept in decision making, argues that the primary function of financial accounting is in the assessment of achievements. It also argues that this indicates a need for ex-post measures which are conceptually distinct from discounted present value. This note complements their work by arguing that accountants do not have a comparative advantage in the determination of discounted present value for investors and that this task should be left to the stock market.

The article focuses on joint variance in cost accounting. A number of recent cost accounting texts discuss a three-variance standard cost analysis consisting of a pure price variance, a pure quantity variance and a joint variance, which is due to the interaction of price and quantity differentials. The explicit treatment of the joint variance facilitates understanding of variance analysis generally; and is particularly useful in explaining why, in a two-variance analysis, the quantity or usage variance usually is based on standard price and the price or spending variance usually is based on actual quantity. Conditions, which produce a favorable or unfavorable joint variance, are not as apparent as with the other variances; and students often have difficulty with this point. Purposes of the paper note are to list these conditions for the joint variance and to present a graphical analysis, which can be useful in demonstrating relationships involved. Since the relationship between the joint variance and the price and quantity variances is multiplicative, the sign of the joint variance is independent of magnitudes of the price and quantity variances.

Contemporary problem of concern to all technology-rich industrialized societies is that of continuing to provide a high level of motivation for private enterprise while ensuring that its aggregate impact upon society is consistent with social goals and aspirations. This is an exceedingly complex problem for several reasons. Traditional performance criteria for private enterprise have emphasized results which may be in conflict with societal priorities. There are many divergent views as to the most desired social goals and aspirations. The qualitative dimensions of social goal formulation and evaluation add further to the complexity. Yet, the problem is of such significance that there is a pressing need to explore its many dimensions and find ways of formulating solutions. The nature of the problem can be related further to performance as it is typically viewed from a management perspective. A corporate management's attention, decisions and actions are focused more on those components of the firm's performance which are included in the firm's formal measurement system. To the extent that a firm's social impacts are not subjected to formal measurement process, these aspects are not likely to enter into the firm's planning decisions or performance evaluation.