Management Accounting in Activity Networks

Abstract

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 produced inputs.