Center for Economic Research, Department of Economics, University of Minnesota
Modern management accounting information systems trace cost to a greater level of
detail than did their product costing predecessors. Nonetheless, the basic ingredient of
accounting information continues to be the measurable transaction, actual or budgeted,
rather than the more subjective concepts of marginal cost or opportunity cost favored by
economic theory. This paper studies the design of a management accounting information
system as a mechanism design problem for a decentralized firm, where the mechanism
is constrained to use messages consisting of actual or proposed transactions, or reports
compiled exclusively from such messages. The firm is modeled as a network of productive
activities, some of which produce revenue while others produce goods or services used by
other activities. The firm seeks a budget, that is, a proposed action for each activity, that
maximizes profit. An accounting information system includes a performance measure for
each activity, and each activity manager is assumed to act to maximize measured performance.
Several accounting information systems are constructed and compared according
to the profitability of the budgets they generate. Although accounting information is not
sufficient to ensure profit-maximization, activity-based costing (ABC) is shown to be
useful in identifying products that should be dropped and internally produced inputs that
should be purchased from external sources. An extension of ABC that includes a measure
of internal opportunity cost is constructed and shown to be useful in allocating internally
Jordan, J.S., (1994), "Management Accounting in Activity Networks", Discussion Paper No. 277, Center for Economic Research, Department of Economics, University of Minnesota.
Management Accounting in Activity Networks.
Center for Economic Research, Department of Economics, University of Minnesota.
Retrieved from the University of Minnesota Digital Conservancy,
Content distributed via the University of Minnesota's Digital Conservancy may be subject to additional license and use restrictions applied by the depositor.