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Relevant Costs Or Full Costs? : Explaining Why Managers Use Capacity Cost Allocations for Short-Term Decisions

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Relevant Costs Or Full Costs? : Explaining Why Managers Use Capacity Cost Allocations for Short-Term Decisions Relevant costs or full costs? : explaining why managers use capacity cost allocations for short-term decisions Citation for published version (APA): Wouters, M. J. F. (1993). Relevant costs or full costs? : explaining why managers use capacity cost allocations for short-term decisions. MAKLU. https://doi.org/10.6100/IR392234 DOI: 10.6100/IR392234 Document status and date: Published: 01/01/1993 Document Version: Publisher’s PDF, also known as Version of Record (includes final page, issue and volume numbers) Please check the document version of this publication: • A submitted manuscript is the version of the article upon submission and before peer-review. There can be important differences between the submitted version and the official published version of record. People interested in the research are advised to contact the author for the final version of the publication, or visit the DOI to the publisher's website. • The final author version and the galley proof are versions of the publication after peer review. • The final published version features the final layout of the paper including the volume, issue and page numbers. Link to publication General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal. If the publication is distributed under the terms of Article 25fa of the Dutch Copyright Act, indicated by the “Taverne” license above, please follow below link for the End User Agreement: www.tue.nl/taverne Take down policy If you believe that this document breaches copyright please contact us at: [email protected] providing details and we will investigate your claim. Download date: 08. Oct. 2021 Relevant Costs or Full Costs? Explaining Why Managers Use Capacity Cost Allocations for Short-Term Decisions Marc J.F. Wouters MANAGEMENT ACCOUNTING Relevant Costs or Full Costs? Explaining Why Managers U se Capacity Cost Allocations for Short-Term Decisions Relevant Costs or Full Costs? Explaining Why Managers Use Capacity Cost Allocations for Short-Term Decisions PROEFSCHRIFf ter verkrijging van de graad van doctor aan de Technische Universiteit Eindhoven, op gezag van de Rector Magnificus, prof. dr. J.H. van Lint, voor een commissie aangewezen door het College van Dekanen in het openbaar te verdedigen op vrijdag 19 maart 1993 om 16.00 uur door MARCUS JOHANNES FRANCISCUS WOUTERS Geboren te Eindhoven Dit proefschrift is goedgekeurd door de promotoren prof. dr. J.A.M. Theeuwes prof. dr. ir. J.W.M. Eertrand CIP-GEGEVENS KONINKLUKE BIBLIOTHEEK, BRUSSEL Wouters, Marcus Johannes Franciscus Relevant costs or full costs? : explaining why managers use capacity cost allocations for short-term decisions I Marcus Johannes Franciscus Wouters.- Antwerpen ; Apeldoorn : Maklu, 1993. -Proefschrift Eindhoven. -Met lit.opg. - Met samenvatting in het Nederlands. ISBN 90-6215-364-X NUGI 683 UDC 657.474:159.955 NBC 85.25 en 77.33 Omslag: Els Vermeltfoort c 1993 M.J.F. Wouters All rights reserved. No part of this book may be reproduced, in any fonn or by any means, without permission in writing from the author. CONTENTS PREFACE ........................................ 7 CHAPTER 1 ....................................... 9 Introduction: capacity utilisation decisions, economie approaches and uncertainty 1. Some contemporary discussions 10 2. Terminology 14 2.1. Capacity utilisation decisions vs. decisions on the amount of capacity 15 2.2. Economie consequences of capacity utilisation decisions 15 2.3. Economie approaches to capacity utilisation decisions 21 2.4. Purposes of this study and overview Chapter 1 23 3. Empirica! findingsin the literature 24 3.1. Personal impressions of authors 24 3.2. Pricing and other decisions 25 3.3. Transfer pricing systems 27 3.4. Empirica! findings: condusion 27 4. Searching for explanations: Cost allocations to different users 28 4.1. Cost allocations to stimulate cooperation 28 4.2. Cost allocations to prevent collusion among agents 29 4.3. Cost allocations to improve capacity planning 30 4.4. Cost allocations to coordinate decision makers 31 4.5. Cost allocations to reduce consumption of perquisites 32 4.6. Cost allocations to approximate other costs 32 4.7. Cost allocations to different users: condusion 33 5. Searching for explanations: Approximation of short-run opportunity costs 34 5 .1. Some models 34 5.2. The condition of certainty 35 5.3. Approximation of short-run opportunity costs: condusion 37 2 CONTENTS 6. Searching for explanations: Approximation of long-run relevant costs 37 7. Main condusion from the present study: Full costs are used in the face of uncertainty 38 7 .1. Total demand for capacity 39 7.2. Involved commitments 41 7.3. Better activities with a higher contribution margin 43 7.4. Avoidabie costs 43 7.5. Uncertainty to explain a full cost approach: condusion 44 8. The structure of this study 45 Notes to Chapter 1 46 CHAPTER 2 . 51 Gomparing a full cost approach with a relevant cost approach 1. The evolution of the relevant cost approach 51 1.1. Clark 52 1.2. Opportunity costs applied to accounting at L.S.E. 53 1.3. Relevant costs in early publications of professional bodies 56 1.4. Relevant costs in textbooks 58 1.5. Condusion 61 2. A relevant cost approach to capacity utilisation decisions 61 2.1. Starting point: Planning for the amount of capacity 62 2.2. Capacity utilisation decisions specify and change the utilisation plan 66 2.3. Costs involved in capacity utilisation decisions 68 2.4. Definition and summary 71 2.5. Underestimation and overestimation of relevant costs 71 3. A full cost approach to capacity utilisation decisions 72 4. Comparing the performance of both approaches 73 4.1. Neither approach is optimal 73 4.2. When the relevant cost approach erroneously accepts an activity 74 4.3. When the relevant cost approach erroneously doesnotaccept an activity76 4.4. Conclusion 78 5. Comparing the in formation requirements of both approaches 78 5 .1. Full cost approach 78 5.2. Relevant cost approach 79 5.3. Information requirements: condusion 79 6. Condusions of Chapter 2 79 Notes to Chapter 2 80 3 CHAPTER 3 . 85 Theoretica! framework and hypotheses 1. Framework 85 1.1. Introducing versus continuing, and production versus changing working-method 86 1.2. Certainty/uncertainty 86 1.3. Reversibility/irreversibility 86 1.4. Postponement is possible/impossible 87 1.5. Relevant cost approach suggests acceptance/non-acceptance 88 1.6. Conclusions of Section 1 89 2. Selection of relevant experimental conditions 90 2.1. Decisions changing the working method are excluded 90 2.2. Relevant cost approach suggests acceptance 90 3. Hypotheses 91 4. Conclusions of Chapter 3 92 Note to Chapter 3 93 CHAPTER 4 . 95 Prospect theory and a .full cost approach 1. Introduetion 95 1.1. Introduetion to prospect theory 95 1.2. Introduetion to the concept of Chapter 4 97 1.3. Cost/benefit trade-off 99 1.4. Continuity argument 99 2. Prospect theory 100 2.1. Editing 101 2.2. Evaluation 102 3. Implications of prospect theory 105 3.1. Domain-specific risk preferences 105 3.2. Effect of problem formulation 107 3.3. Aspiration level effects 109 3.4. Translation of choice problems 109 4. Prospect theory and capacity utilisation decisions 114 4.1. Aspiration levels 115 4.2. Using gross margin todetermine the aspiration level 117 4.3. Risk attitudes in capacity utilisation decisions 119 5. Conclusions of Chapter 4 128 Notes to Chapter 4 129 4 CONTENTS CHAPTER 5 ...................................... 141 Experimental design 1. Further selection of relevant conditions 141 2. The experiment 142 2.1. The experimental task 143 2.2. The independent variables 143 2.3. Contextual infonnation 144 3. Measuring the approach foliowed 145 3.1. Looking at decisions resulting from an unsatisfactory gross margin 145 3.2. Analyzing verbal explanations 146 3.3. Comparing decisions fora satisfactory and an unsatisfactory gross margin 147 4. Within-subject vs. across-subjects design 147 4.1. Advantage of within-subject design 147 4.2. Disadvantage of within-subject design 148 4.3. Reasons for preferring the across-subjects design 149 4.4. The across-subjects design 150 5. Alternative outoornes and probabilities 151 6. Packages and sequences of cases 152 7. Conclusions of Chapter 5 154 Notes to Chapter 5 154 CHAPTER 6 ...................................... 157 lmplementation, results and discussion 1. Implementation 157 1.1. Selection of participants 157 1.2. Participants 160 1.3. During the appointments 160 2. Results 164 2.1. Results regarding Hypothesis 1 164 2.2. Results regarding Hypothesis 2 165 2.3. Results regarding Hypothesis 3 166 3. Discussion 167 3 .1. Selection bias 167 3.2. Effect of the number of observations 168 3.3. Contextual information 168 3.4. Decisions for the negative versions are less conclusive 171 5 3.5. The effect of postponement 171 4. Conclusions of Chapter 6 172 CHAPTER 7 0 •••••••••••• 0 0 ••••••••••••••••••••••• 175 Conclusions 1. Conclusions 175 1.1. Providing empirical evidence 175 1.2. Explaining the use of full cost approaches 175 1.3. Contributing to discussions about decision relevanee of ABC 177 2. Limitations 178 3. Questions for funher research 178 APPENDIX 1. The cases 0 ••••••••.•• 0 •• o •• 0 ••.• o •• o o • 0181 APPENDIX 2. Introduetion to participants 0 o •••••• o •••••••••• 195 APPENDIX 3. Questions and answers ........... 0 ••• 0 •••• 0 • 197 APPENDIX 4o Adapted results 0 • 0 .•.
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