ADDITIONAL QUESTION

7. Explain the content of agency theory in accounting and explain the finding concerning the
role of agency theory based on the paper discussed in the class?

Answer :

Agency theory is a principle that is used to explain and resolve issues in the relationship between
business principals and their agents. Most commonly, that relationship is the one between
shareholders, as principals, and company executive, as agents.

8. Explain behavioral aspect of profit planning and budgeting and explain the finding of the
study concerning behavioral aspect of budgeting based on the paper discussed in the class

Answer :
Budgets have a direct impact to human behavior. Budgets are managerial plans for
expressed in financial terms. They are short-term comprehensive profit plans that put
management’s objectives and goals into operation. They are managerial tools that insure the
attainment of organizational goal.
In behavioral overview of the budget-making process, there are three major stages in the
budget-making process:
1. Goal setting,
2. Implementation,
3. Control and performance evaluation.

To develop a budget or profit plan, certain sequential steps have to be taken:

1. Top management has to decide what the firm’s short range objectives are and what
strategies will be used to attain them.
2. Goals have to be set and resources allocated. Goals are the short-range quantification of
the objectives.
3. A comprehensive budget or profit plan has to be prepared then approved by top
management.
4. Finally, it is used to control cost and to pinpoint problem areas in the organization by
periodically comparing actual performance results to the budgets goals.

9. Explain the the characteristic, the role of responsibility accounting and explain behavioral
assumption of responsibility accounting.

Answer :
CHARACTERISTICS OF RESPONSIBILITY ACCOUNTING
A. Definition
 An accounting system that collects, summarizes, and reports accounting data relating to
the responsibilities of individual managers.
 An accounting system which tracks and reports costs, expenses, revenues, and
operational statistics by area of responsibility or organizational unit.
  The system provides information to evaluate each manager on revenue and expense
items over which that manager has primary control (authority to influence).
 Some reports contain only those items that are controllable by the responsibility
manager.
 Some reports contain both controllable and uncontrollable items;
 In this case, controllable and uncontrollable items should be clearly separated.
 The identification of controllable items is a fundamental task in responsibility accounting
and reporting.

B. Some Basic Requirements.

 To implement a responsibility accounting system, the business must be organized so that
responsibility is assignable to individual managers.
 The various managers and their lines of responsibility should be fully defined.
 The organization chart is usually used as a basis for responsibility reporting.
 If clear lines of responsibility cannot be determined, it is very doubtful that responsibility
accounting can be implemented effectively.
 While decision-making power may be delegated for many items, some decisions (related
to particular revenues, expenses, costs or actions) may remain exclusively under the
control of top management.
 Several items will be directly traceable to a particular manager's area of responsibility but
not actually be controllable by that manager. (Items such as property taxes.)

ROLE OF RESPONSIBILITY ACCOUNTING

Following are the main roles or contribution of responsibility accounting:
1. Decentralization
By dividing the total organization in smaller subunits, the organization becomes more
manageable.
2. Performance Evaluation
Responsibility accounting establishes a sound and fair system of performance
evaluation of each manager and personnel. The performance of each responsibility center
is measured and presented periodically on performance report. 
3. Motivation
Responsibility accounting emphasizes on the individual achievement-based
performance evaluation. Therefore, the job becomes more challenging for the employees
and motivates them to use their full potentiality in achieving the results. 
4. Transfer Pricing
Responsibility accounting divides the organization in different autonomous
responsibility centers or subunits. In such circumstances, product or service of one division
or unit can be transferred to another division or unit within the same organization charging
a transfer price. This creates an inter-competitive environment to make each subunit of the
organization more profitable and efficient.
5. Drop Or Continue Decision
If the organization is divided into subunits, it becomes possible to measure division
wise or product wise profitability of the organization. If saving in costs exceeds the
foregone revenues, the center can be discontinued.

BEHAVIORAL ASSUMPTIONS OF RESPONSIBILITY ACCOUNTING

Responsibility planning, data accumulation, and reporting systems are based on several
assumptions concerning operational and human behavior, including:
 1. Management by exception (MBE) is sufficient to control operations effectively.
2. Management by objective (MBO) will result in agreed upon budgets, standard costs,
organizational goals, and workable plans for their achievement.
3. The responsibility and accountability structure coincides with the hierarchical structure of
the organization.
4. Managers and subordinates are willing to accept the responsibility and accountability
assigned to them through the organizational hierarchy.
5. Responsibility accounting systems induce cooperation rather than competition.

Management by Exception (MBE)

Management by exception assumes that to most effectively manage and control
organizational activities, managers should concentrate their attention on areas where the actual
results deviate substantially from budgeted or standard goals.

Management by Objective (MBO)

This is a management approach designed t overcome the numerous dysfunctional human
responses triggered by attempts to control operations by dominance.
To get optimum motivation and communication from both management by objective and
the responsibility accounting system, certain favorable environmental conditions must exist or be
perceived to exist. These include:
 In setting responsibility center goals, top management must provide overall direction by
specifying the company's overall objectives and goals.
 In the joint formulation of detailed performance goals and action plans, top management
and responsibility center managers must maximize the congruence between the personal
needs and career aspirations of work groups and overall company goals
 Motivation is enhanced if people believe that the achievement of company goals will
simultaneously satisfy their personal needs.
 If people perceive organizational goals as compatible with their own, then they will
internalize company goals and goal congruence is reached.

Coincidence Between Responsibility Network and Organizational Structure

Responsibility accounting assumes that organizational control is enhanced by creating a
network of responsibility centers that coincide with the formal organizational structure. The
responsibility network is as effective for controlling an organization as the underlying
organizational structure is rational. Responsibility centers are the basis for the entire responsibility
accounting system, the framework for them must be designed carefully. The organizational
structure has to be analyzed for weaknesses in delegation and dispersion.

Acceptance of Responsibility
The most crucial element in a successful responsibility accounting system is the
responsibility center managers' acceptance of assigned responsibilities as equitable and their
willingness to be held accountable. Research has only been able to demonstrate a definite
correlation between the willingness of “disclosure” (or the capability of subjective cognitions and
evaluation of oneself) and attitudes toward responsibility acceptance.

Capability of Inducing Cooperation

Responsibility accounting improves organizational cooperation by showing managers
where their activities fit into the overall picture and that everybody is working toward common
goals
  Company Loyalty
 Self Esteem

10. Explain determinants and consequence of participative budgeting based on the article
discussed in the class

Answer :
In determinats participative budget based on the paper , there are 4 streams

1. The first stream is based on contingency theory (see Birnberg et al. (19901). This research
has found that contextual variables, such as environmental uncertainty and technology, are
correlational ante- cedents of participative budgeting [Birnberg et al. 1990).

2. The second stream stems from the work of Locke and colleagues and is focused on
individual level participation and its motivational consequences (e.g.. motivation,
commitment, performance, satisfaction) [Locke andSchweiger, 1979; Leana et al., 1990].
Locke proposes that the benefits of participative decision making are work motivation
and/or cognitive un- derstanding. The cognitive perspective has not been pursued nearly as
much as the motivational perspective; however, this direction for research is gaining
momentum as Locke et al. [1981. p. 139] state that,... the single most successful field
experiment on participation to date stressed the cognitive benefits: participation was used to
get good Ideas from workers as to how to Improve performance efficiency. Recently, some
participative decision making research has either tested hypotheses based on the cognitive
perspective or tested the relative strength of motivational and cognitive explanations [Locke
and Latham. 1990, pp. 170-1]. 3.

3. The third stream of research stems from the Japanese management literature. Many Japanese
firms employ concepts such as participative decision making and quality circles with the
goal of obtaining accurate infomiation about local conditions in the various parts of a firm
[Ouchi, 1979; Young. 19921. This information is used to improve firm-wide perfor- mance
directly through more efficient resource allocation. Whfie motiva- tional consequences like
improved morale and job satisfaction may occur, they are not the primary reason for
participation in Japanese firms.

4. Finally, ln contrast to many of the behavioral studies, agency theorists have analytically
modeled how differences in information between a supe-participative budgeting In
organizations IMagee. 1980; Chrlstensen. 1982; Balman and Evans. 1983;Penno. 1984,
1990; Kirby etal.. 19911. The agency view is that participation Is used by a superior to learn
about the local environment so that decisions such as resource allocation can be improved
and optimal Incentive contracts designed for subordinates.^

According to the definition of partipative budget itself is a budget in which important employees have
direct input in an organization's budgetary process.in consequences focus on ( performance, decision
performance, motivation, satisfacti0on, and acceptance of consequences given participation). The
Accounting Review. Journal of Accounting Research and Accounting. Organizations and Society
from 1970 through 1991. Of the 28 studies, 24 examined only the consequences of participation.'
Bruns and Waterhouse [19751 and Seiler and Bartlett 11982] examined (cross-sectional) determi-
nants of participative budgeting and only Merchant [1981, 1984] exam- ined both determinants and
consequences. A consistent belief rooted inearly participative budgeting studies [Argyris, 1952;
Becker and Green. 1962] was that participation was used to improve outcomes such as em- ployee
morale, motivation, commitment and satisfaction. The inclination to study consequences Is highly
consistent with research on participative decision making in contexts other than budgeting [Locke
and Schweiger.

11. Explain the findings of the early research in behavioural accounting

Answer :

• ARGYRIS (1952) “The impact of budget on people”.

• Finding Reliance on Accounting Performance Measures (RAPM) increase dysfunctional

behavior such as tension; hate; suspicious; worried; lack of confidence.

• Hopwood (1972) “An Empirical Study of the Role of Accounting Data in Performance
Evaluation”.

• Otley (1978) “Budget Use and Managerial Performance”

• Extent research by Argyris

12. Explain scope and characteristic of behavioural accounting

Answer :

Characteristic of behavioural accounting

• Behavioral accounting (BA) is part of accounting science which study relationship
between accounting and human behavior.
• BA study the effect of accounting process and accounting output to human behaviour
and the effect of behavior on accounting.
• BA is extention of traditional role of accounting
• Traditional role of accounting as accountability (finansial accounting) and as managerial
tool (management accounting)

Scope of behavioural accounting

• The effect of human behavior on the design, construction and the use of accounting system.

• The effect of personalities of management to tightness and looseness of control

• The effect of accounting system on human behavior

• Accounting system affect negative and positive aspect of behavior

• Method to predict and strategies to change human behavior à using experimental research

• The role of empirical research in BA is important