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|Title:||Variance Contamination Due to a Systems Environment|
|Author(s):||Mackey, James Thomas|
|Department / Program:||Accountancy|
|Degree Granting Institution:||University of Illinois at Urbana-Champaign|
|Subject(s):||Business Administration, Accounting|
|Abstract:||This dissertation analyzed the use of standard costing for exception reporting in a systems environment. Standard costing, when used with a ex post flexible budget, has been commonly used in accounting to support management by exception. An assumption of responsibility center accounting is that each of the responsibility centers is independent. An organization, however, is a system of interdependent departments.
The dissertation is broken into two parts: the theory formulation and the empirical test. A generalized theory of the coordination of day to day operations was first developed. To accomplish this task, coordination mechanisms were grouped into three separate types of activities--buffering, flexibility and information flows. These coordination mechanisms are all methods the organization can use to cope with uncertainty. Buffering may be represented as any activity queue. If a queue exists the server mechanism will not have to wait for the next unit. Demand uncertainty is then eliminated. Flexibility is the ability to adapt or change activities at short notice. Finally information flows represent feedforward and feedback flows that both predict each responsibility centers needs and inform of changed departmental states. If these information flows are more timely the length of the uncertain time period may be reduced. Hence all three mechanisms contribute to imporved coordination between responsibility centers and reduced uncertainty.
Uncertainty, represented by stochastic influences, is an inefficient operational condition. In order to promote efficiency, organizations try to reduce the uncertainty in their environments. Complete certainty may be costly to obtain however. Therefore organizations only rationalize (reduce uncertainty) in a cost effective way. The coordination mechanisms presented in the theory deal with uncertainty in different ways. Assuming managers are economic decision makers, they will use the combination of coordination mechanisms that is most cost efficient.
The empirical test was made on a simulation model using an actual production function and cost data provided in a study by Holt, Miller, Modiglioni and Simon. Three production departments linked in series and activities for five years were simulated. Buffering was represented as in-process inventories. Flexibility was simulated by working overtime, and information feedback was established through a weekly budget revision and one midweekly information flow. Variances were measured weekly. The objective function for each department manager was the minimization of overall system costs and not the minimization of unfavorable variance reports.
In this experiment the managers were programmed to make decisions which minimized costs for the organization as a whole. These decisions, however, would not necessarily minimize the exception reports issued by each department. If the generation of exception reports is contaminated by the system they will not improve management by exception. The exception reports issued were measured under a variety of operating conditions. The results were mixed, but clearly dysfunctional consequences were noted. Exception reports actually decreased for one department when it was programmed to be inefficient.
The conclusions of this dissertation suggest types of environments where improved variance measures for exception reporting purposes are required.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1981.
|Date Available in IDEALS:||2014-12-16|