Summary by Michele Martinez
Ph.D. Program in Accounting
University of South Florida, Spring 2002
Prevalent in the majority of organizations, individual managers performance is based on accounting information. This practice referred to as responsibility accounting, is one of the most important functions of accounting information according to cost textbooks. However, concerns have been expressed about the effects this practice has on management’s behavior. For example, several researchers feel that under the right circumstances management may be motivated to engage in dysfunctional behavior (Hirst, 1981, 1983; Hopwood 1972; Otley 1978). Thus, under certain conditions accounting information may not be the ideal criteria to evaluate management.
The purpose of this paper as stated by the authors, is to provide evidence on the association between the use of accounting information to evaluate the performance of production managers and factors of organization design.
In this study the authors utilize contingency theory as the theoretical basis for this paper. Contingency theory "asserts that there is a relationship between organizational structure and situation, and that organizational effectiveness results from this relationship. The most effective organizational structure will depend or be contingent on the organization’s particular situation." In reference to this particular study contingency theory was applied to suggest an association between the use of accounting information to evaluate managerial performance and design factors of the organization. In addition, the contingency perspective suggests that the use of accounting information to evaluate managerial performance will be contingent upon task uncertainty and departmental interdependence.
When a mismatch occurs between task uncertainty and accounting performance measures, dysfunctional behavior occurs. Thus, the author’s state that the incidence of dysfunctional behavior associated with different uses of accounting performance measures is contingent upon the level of task uncertainty.
Due to the exploratory nature of this study, research questions instead of hypotheses are proposed. The author’s proposed the following research questions because they focus on the relationship between specific production characteristics and the use of production cost information to evaluate the performance of production managers.
1. Are organizations that have a flow shop more likely to use production cost information to evaluate production managers’ performance than organizations with job shops?
2. Are organizations that use work-in-process inventories more frequently more likely to use production cost information to evaluate production managers’ performance?
3. Are organizations that use aggregate accounting methods for set up costs less likely to use production cost information to evaluate production managers’ performance?
For this study the authors’ selected the sample of companies from the Dun and Bradstreet’s 1984 Canadian Guide to Manufacturers and the Harris Michigan Industrial Directory, 1986. The elimination of companies from this list began with companies that were located more than 30 miles from the authors’. Accordingly, approximately 120 organizations were contacted. Of the original 120 organizations contacted the final sample contains the completed responses from 47 firms, representing a response rate of 39%.
This study includes three independent variables. The first variable, a dummy variable is the type of production process used by the plant. The second independent variable is a forced choice response variable, which concerns the extent to which work-in-process inventory is used. The final independent variable is a trichotomous measure, which concerns accounting procedures for set up costs.
The purpose for costing in production departments was the dependent variable for this study. This variable required a 0,1 coding response.
Due to the dichotomous nature of the dependent variable and the possible associations between the independent and dependent variables and the directional research questions Probit regression was utilized to analyze the data.
Research Question 1 (the association between the use of production cost information and the type of production process employed) – production process was significant at conventional levels and the negative beta coefficient indicates the results were in the expected direction. There was a greater tendency for flow shops as opposed to job shops to use production cost information for managerial performance evaluation.
Research Question 2 (the association between the use of production cost information and the frequency that work-in-process inventories are used) – was marginally significant at the .10 level. The positive beta coefficient indicates that there was a greater tendency to use production cost information for managerial performance evaluation when work-in-process inventories were used.
Research Question 3 (accounting method for set up costs is associated with the use of production cost information for managerial performance evaluations) – marginally significant and an increased tendency for production cost information to be used for managerial performance.
The probit model correctly classified 70% of the observations as opposed to the naïve model, which classified the observations, correct 62% of the time. In addition, the hit rates for the probit model were 86% and 44% indicating that the model is able to greatly improve the prediction of non-use of accounting information.
This study is exploratory in nature and explores the association between three organizational design factors and the use of production cost information to evaluate the performance of production managers. There are a few limitations in this study. First, the sample was relatively small and contained only push manufacturing organizations. Thus, the results will not be very generalizable. Future research should examine various types of manufacturing organizations and various types of design factors.
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