Noncontrollable Costs and Optimal Performance Measurement

Abstract

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.

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