Management information changes and functional fixation: Some experimental evidence from the public sector

MANAGEMENT INFORMATION CHANGES AND FUNCTIONAL FIXATION: SOME EXPERIMENTAL EVIDENCE FROM THE PUBLIC SECTOR*

Department

PAUL BARNES of Economics, UCW,

Bangor, U.K

and JOHN WEBB Peat Marwick Mitchell G Co, London, U.K

Abstract Actual managers were presented with case studies concerning recommended selling prices. Evidence was found for functional fixation in the conventional accounting sense, but in the original psychological sense the results were inconclusive

Functional fixation has now become a well established concept in the behavioural aspects of accounting measurement research (see for example AAA, 1978; Anderson, 1979). One may observe how warmly it has been embraced by capital market researchers (for example Beaver, 1972, 1974; Bierman, 1974 and Findley 1978 especially).’ However it is in management accounting and information systems that it has the most intuitive appeal and it is in this context that it was first discussed (Ijiri et al., 1966). It is rather strange that there has only been scant empirical work (Ashton, 1976; Chang & Birnberg, 1977; Swieringa et al., 1979; Dyckman et al.. 1982; Bloom et al., 1984) and that there is little mention in the management accounting textbooks. Functional fixation (or fixity) is a concept originally deriving from psychology. Duncker ( 1945 ) popularized the hypothesis that an individual’s prior use of an object in a function dis-

similar to that required by a present problem would serve to inhibit the discovery of an appropriate new use for the object. To illustrate, a stick that has previously been used by an individual as a ruler, that is, as a measuring tool, is unlikely to be considered a tool for other purposes; the individual may become fixated on only one function of that object. Previous experience with an object may not always lead to fixation upon its function, however. Birch & Rabinowitz ( 195 1) found that, although learning about one function of an object may restrict the variety of ways in which it is used, individuals may also learn about an objects’ versatility and so display a relatively low degree of functional fixation with respect to it. The results of the experiments of Flavell et al. (1958) supported this. There are a number of other personal and situational factors that may affect the degree of fixity displayed by an individual with respect to a par-

* The authors are particularly grateful to Chris Cowton of I’.W.I.S.T. for his helpful anonymous referees for their constructive and wide-ranging comments.

’ One also observes

its application

in the research

of investor

decisions 1

suggestions

(e.g. Livingstone.

on this research

1967: Mlynarczyk.

and to two

1969).

2

PAIL BARNES and IOHN WEBB

ticular object. Such mediating factors might include the span of time since the object was previously used (Adamson & Taylor, 1954) the necessity of using the object in a novel way to solve the problem (Dunker, 1945) or hints (Saugstad & Raaheim, 1960). Luchins & Luchins (reprinted in Watson & Laird, 1968) found a tendency for subjects to use a particular method repeatedly for a series of similar tasks although some of them had more direct solutions. Their experiments showed that furedness arising from previous experience is common to all people, however more intelligent individuals may be better at overcoming its negative effects. particularly where the subject’s fixedness prevents him from finding a problem solution. Ijiri et al. were concerned with something rather different - the conditions under which a decision maker might be unable to change his decision process in response to a change in the underlying accounting process which supplies him with decision data. Ijiri et al. suggest that functional fvration might inhibit such an adjustment. They state: Psychologists have found that there appears to be ‘functional fixation’ in most human behavior in which the person attaches a meaning to a title or object (e.g. manufacturing cost) and is unable to see alternative meanings or uses. People intuitively associate a value with an item through past experience, and often do not recognize that the value of the item depends, in fact. upon the particular moment in time and may be significantly different from what it was in the past. Therefore, when a person is placed in a new situation, he views the object or term as used previously (Ijiri et al.. 1766, p. 174).

Ijiri et al. attempted to place functional hxation in an accounting context by stating that If the outputs from different accounting methods are called by the same name. such as protk costs, etc., people who do not understand accounting well tend to neglect the hct that alternative methods may have heen used to prepare the outputs. In such cases. a change in the accounting process clearly influences the decisions.

An extrapolation of functional fixation into behavioural aspects of accounting may well be quite correct, after all the concern is with psychological behaviour. To extend the concept

from objects to data is also acceptable although it should be borne in mind that there is no empirical evidence from psychology of such behaviour. However the extrapolation by Ijiri ef al. went beyond this when they focused not on function but on output. We note that subsequent accounting researchers have apparently failed to notice the difference and regard Ijiri rt al’s concept as well grounded in the psychological literature. which of course it is not. The notable exception to this is Ashton ( 19’6). He recognised the distinction between the two but comes to a rather strange conciusion. that “We should recognise that the functional tixation hypothesis in accounting is a moditied form (or forms) of the hypothesis in psychology. The modified functional fixation hypothesis should be subjected to research in accounting contexts ” He then proceeded to test just Ijiri et af.‘s hypothesis. Our approach is different: it is our view that both concepts provide insights and represent different aspects of the behaviour of financial decision makers. There have been three other experimental studies testing Ijiri et al’s hypotheses. The first is by Swieringa et al. ( 19-‘9) which explicitly took into account Libby’s (19’6) remarks in the experimental design. (Libby criticised Ashton [ 19761 for an experimental design which may have become confounded with the effects of the accounting change.) Swieringa et al. found that subjects tended to adjust their information processing because of the accounting change, even though the significance of these adjustments differed depending on how they were measured. Subjects’ adjustments of their information processing because of the accounting change also tended to be influenced by the amount of information provided about the change, but not in the direction expected. A second study by Dyckman et al. ( 1982 ) merely replicates this but this time on subjects who on average are older and have had more exposure to accounting and business matters. The results of the 1982 study were similar to the 1979 study. More recently Bloom et al. ( 1984) found that both individuals and small groups exhibited functional fixation in the product pricing decision in response to fully

MANAGEMENT

INFORMATION

disclosed, cosmetic changes in depreciation method. All four studies may be criticised for their choice of subjects in that they are not “real” decision makers, in fact students, most of whom had never made business decisions in their lives. Ashton’s ( 1976) study was of first year management accounting students on an MBA course, Swieringa et al’s ( 1979) study was of students on an introductoq accounting course in a college of agriculture and life sciences who did not know what direct costing meant. The 1982 study was of students on a cost accounting course in a graduate school of business. The Bloom et ai. ( 1984) study was of upper-level undergraduate accounting of first- or secondyear MBA classes. The extrapolation by accounting researchers has contained a serious flaw. A distinction should be made between the psychological phenomenon in question and simple ignorance. Note Ijiri’s give away “people who do not understand accounting well tend to neglect .” Ashton’s study was dimissed by Pearson ( 1976) a practising accountant, who claimed that the inability of subjects to change in response to an accounting change was due entirely to ignorance. It is our view that functional fix&y and ignorance are separate phenomena and that, in order to identify the former empirically, the absence of the latter needs to be ensured. The remainder of this paper reports an empirical study conducted in a public authority utilising actual and sophisticated decision makers and variable and full cost data. It is arranged as follows: firstly the organisational setting is outlined and the system of management accounting data and overhead calculation procedures are brie@ described. The tested hypotheses are then set out, the experiment described and the result analysed. The final section is by way of a conclusion.

THE EMPIRICAL STUDY Background It is necessary

to consider the empirical set-

CHANGES

3

ting in order to assess the variables affecting the decisions being studied. (This contrasts with those laboratory studies of students which ignore these environmental factors. ) There are various reasons why it is particularly necessaq here. Firstly, functional fixity has usually been expected to vary with certain environmental and personality factors. (See the third paragraph of the introduction to this paper. ) Here the two groups of subjects differ as to their exposure to, and use of. accounting data. Finally, the environmental factors are later discussed as affecting subjects’ functional fixity and behaviour. The study involves a public authority in the U.K. which conducts scientific research but also undertakes some commerical work. Our interest is in decision making in two of its major laboratory sites (H and C). H’s commercial activities are considerable, and increasing, whereas those at C are subsidiary to its main role of scientific research and are decreasing. Also C has one major government-funded programme. The general feeling is that there is likely to be greater emphasis placed on the success of commercial operations at H and a greater awareness of the importance of commercial income as a supplemenr to the annual “parliamentary vote”. At both laboratories departmental managers, who are scientists or engineers, decide which projects, both commerical and non-commercial to accept. They also fix the prices for commercial work, and this is the focus of our study. The method of allocating overheads to projects in the two laboratories was different. At H both a general overhead rate and a divisional overhead were charged. The former originally was comprised of two rates depending on the scientific nature of the contract. From April 1979 a common general overhead rate was introduced. C’s system for the allocation of overhead costs was simpler. Prior to April 1979 non-commercial projects were charged only with what were considered controllable costs, and overheads were not allocated to these projects. Commercial projects received overhead allocations at a single rate, this being a percentage of staff costs. From April 1979 onwards all projects were

t

PACL

BARNES

charged with overheads, although commercial projects were charged at a slightly lower rate than other projects. This change in allocation method represented a change in the previous policy of not allocating overhead costs of noncommercial projects rather than a change in the way that allocation rate was computed, which is what happened at H. All departments are expected to make an adequate financial return. What is considered acceptable is not fully expressed within the authority. However it is periodic and based od full costs and should meet the cost of capital employed. This is estimated by the authority in its calculation of the Treasury Discount Rate, TDR, which is assessed for individual projects as a percentage of full costs. From discussions with scientists, engineers and accountants at the two sites it was possible to model the process. See Fig. 1. Also four basic criteria for acceptance were identified. These were ( 1) financial acceptability, (2) compatibility with current goals and future development plans, (3) resource availability, (4) scientific value. Discussion also showed that these may also be broken down into seventeen sub-factors. (See Appendix 1.) A questionnaire was then arranged in order to assess the relative importance of these as perceived by the decision makers. It is largely unnecessary to

andJOHN

\VEBB

report the details of the investigation here. The results indicated that in regard to the criteria listed above: 1. Managers did not consider the financial criteria for project acceptance to be particularl! important. The results indicated that financial targets (budgets) were a constraint which needed to be satislied rather than being important goals. However there was a wide divergence of opinion between the respondents. 2. That compatability with current organisational goals was desirable and important: in particular compatability of the project and the Division’s scientific expertise. Also compatability of the project with future development plans w;1s regarded as particularly important. Respondents looked for projects that increased customer goodwill and improved the laboratory’s reputation. 3. The availability of manpower was regarded as the single most important factor. The availability of other non-financial resources such as capital equipment was of secondary importance. 4. The scientific value criterion was regarded as the second most important factor. 5. Managers stated that there was in fact a fifth criterion: a desire to undertake work for others which would be a direct benefit to the general community.

) pro1ect 1 I I )

Factors

12)

Factors goals

(3)

’ Resources

Factors

reflecting reflecting and

plans

reflecting

scientific

vahe

compatlbllity for

future

to

current

development

avallabl(ity

of

resources

and

1 financial 1 factors as , constraints I activity 1 Weak crlterla , for project I acceptance.

on

Strong criteria for acceptance

Accept

Fig.

project

I. A simple rqwrsentation

of the decision

whether

or not to

accept a commercial

project

/ ,

MANAGEMENT

INFORMATION

We may now make some comments about the operation of the commercial projects decision process. When a project is considered initially its scientific value is assessed. If its value is not particularly high, then its compatability with the unit’s goals and plans is considered. If projects either have a high scientific value in their own right or can be expected to lead to the fulfilment of goals and future plans then the “resources” and “financial” factors appear to act merely as constraints on activity. Financial factors will tend to be relatively unimportant in influencing decisions, as long as at least acceptable financial returns’ can be shown and the resources required can be obtained somehow for the work. However. if a project does not appear to have great scientific value and its aims are not particularly congruent to those of the organisation. then the “resources” and “financial” factors may become the goals of the activity. This will tend to be the case. particularly where resources are under-utilised and an accounting profit is likely to be shown which can be attributed to that project. It would seem that ifthe profit must be shown from the project in question, then earning of a contribution to overheads less than full cost is unlikely to be acceptable to the authority because the reporting methods will show the total revenues to be lower than the total costs. The fact that a “loss” is shown and that the project’s continuation has to be justified to Head Office (assuming it is of a reasonable size) tends to ensure that the project is not undertaken, even though there may be an element of resource under-utilisation if no alternative exists. It may be seen, therefore, that the project decision is strongly influenced by an arbitrary allocation of general overhead costs, at least as far as the marginal projects are concerned. From Fig. 1, it can be seen that for a project to be accepted the “resources” factors and the “financial” factors must be satisfied, whereas that is not necessarily so for either the “scientific value” factor or the “compatability” factor. However, the extent to which these latter factors are, or are not. satisfied may determine the consequent importance of the other factors and can

<:HAN
therefore, influence project acceptance.

5

their effects as a barrier to

The primary aim of the experiment was twofold. First, it was intended to determine the extent to which managers in a public authority are functionally fixated with internally reported “costs”. Second, it was intended to try to discover elements of the decision process that distinguish between managers who are highly fixated and those who are less fixated. (As ma) be seen from the introductory section, most previous studies limited their attention to the former. ) The idea of the experiment V&IS to provide two case studies to managers which would provide the basis for two project decisions, the only difference between the two case studies would be the overhead accounting method employed. Consequently. it would appear reasonable to suppose that the difference was affected by the cost. Those subjects who proposed a different price would be those who were fixated with the reported “total costs” figure. This was particularly so if sufficient additional information was provided to restate the figures in line with the alternative method, and ifmanagers’ objectives in making the decision did not vary. It will be appreciated that a study of this type, like most other accounting functional fixation studies, is concerned with the output from different accounting methods (as conceived by Ijiri et al. [ 19661, as outlined in the first section of this paper). To keep his decision process constant a user of accounts must make appropriate adjustments when the accounting process is changed. For our purposes an “efficient” information processor is defined as one who does this. an “inefficient” information processor alters his perception of the significance of the accounting numbers in line with the extent of the change, even though that change has no economic significance. In other words, the decision will be based on the cost number reported irrespective of the accounting method influencing its magnitude. Another aim of the experiment was to see

6

PALL BARNES andJOHN

whether pre-utilization experience of accounting reports prevented subjects from finding a novel, but appropriate function for that report (appropriate that is for making decisions on commercial work). Pre-utilization experience involved (a) a change in the overhead allocation method in which the subjects would have learnt that the allocations of overhead costs are discretionary and to some extent arbitrary and (b) the making of many financial decisions in difTerent circumstances, causing the subjects to have developed a more flexible decision process because of the need to deal with a greater diversity of projects. The novel function in this case is the use of the data to solve the problem of covering direct costs, instead of full costs. This is compatible with the “functional fixedness” hypothesis as originally developed by psychologists and mentioned in the introduction to this paper. Here the focus is on the function of a financial report (the psychologists used physical objects) and whether it would be used to solve a new problem to that which the subject previously used it. It should be pointed out that the results of this study have to be carefully interpreted as managers may not recognise the new problem - that of covering only direct costs. Thus a preoccupation with full costs may indicate either a fixation with total costs, which hinders a solution, or it may indicate the subject’s belief that this objective should not be merely to ensure the earning of a contribution to overheads, but rather to earn sufficient income to cover the full costs. The principal hypotheses, therefore, are: Hypothesis I Scientists and engineers working for the authority are fixated, to varying degrees with the “total costs” figure. regardless of how calculated, and that their allocation of resources to commercial projects will be influenced by a change in the method of allocating overhead costs. This hypothesis stems from the demonstration by both psychology and accounting researchers, that the effect of previous experience can tend to restrict a subject’s perception of the meaning and significance of a concept or object. Hypothesis 2. Scientists and engineers will tend to try and recover all overhead costs allocated to spccitic projects bccausr of their experience of doing so. regardless of

WEBB

whether overhead allocation is based on tit11 or onl! direct costs. Indeed. the criteria for project selection were altered in the case studies in order to allow the manager to accept a project that recovered merely the dirccr costs even though such a decision would not always be acceptable. Had this not been done. it would have been logical for subjects to reject projects that did not recover full overheads simply because, in practice. senior man. agement would hare vetoed them Such subjects. though not Bxated, would have appeared to be. Hypothesis 3. Managers from H \y111 tend to be less fixated than those from C because: (a) they have experienced a change in overhead allocation method in which they would have learnt that the allocations of overhead costs are discretionary and to some extent arbitrary, and (b) they have had a greater prr-utilisation experience ot making commercial decisions under different situations. (H has more experience of commercial work than (1.1 In other words H managers should have developed a more flexible decision process because of the need to deal with a greater diversity of projects.

As explained earlier, the primary aim of the experiment is not to investigate whether the decision concerning price is strictly rational. but to see if the required “minimum acceptable price” would change because the accounting method has changed. Hypotheses 1 and 3 are concerned with this and the determination of a common factor linking those subjects influenced greatly by a change in method, and a factor linking those who appear to be less fixated. Hypothesis 3 is concerned with the second aim of the experiment; whether or not subjects can use the data provided for a different function, namely the making of a decision regarding variable, not full, costs. The experiment There were seventeen subjects (ten from H. seven from C ) who were chosen as being representative of the two establishments’ commercial operations. Fourteen were scientists and three were engineers. Although a sample of seventeen might appear to be small, we do not believe it could have been made substantially larger, given the need to include only managers of the right background and seniority for the decision simulation being investigated. The sub-

MANAGEMENT

INFORMATION

jects were divided into four groups. two from C and two from H. so that some managers from each establishment could be provided with full cost data in the first case study and others with variable cost data. Managers were each presented with project specifications and told that the criterion for project selection had changed because of undercapacity such that project receipts had to cover direct costs and that the work had to be completed in the current financial year. The project specification included: ( a ) a background (non-financial) statement which explained the context in which the financial statement should be considered. This background statement was heavily infhtenced by the responses to the earlier questionnaire regarding factors inthtencing decisions, and implied that there would be no significant nonfinancial beneflts. The idea was to suggest that the project in question would only be valuable because of the “contribution” it would make overhead costs: (b) a financial estimate. In order to make the case study as realistic as possible a number of measures were used. including: ( i) the Authority’s own means of classi&ing costs and procedures for presenting project estimates. (ii) H and C subjects received case studies which were substantially the same and with which they were familiar. It was possible to keep their own actual overhead rates yet keep the ‘total costs” figures reported to members of both laboratories the same. Two of the financial statements contained full cost data. The other two financial statements contained direct cost data. Because each manager was eventually to receive both types of statement each cost figure in the direct costs statements was exactly 1.35 times the corresponding figure on the full costs statements. This was done to prevent subjects from recognising the numbers of their second case study and repeating their original answers. Where statements showing full cost data were produced the

CHAN<;ES

overhead rates were shown, together with the method of calculating them. Where statements showing direct cost data were produced the overhead rates were reported by way of a note; furthermore the amount of each of these items was calculated and presented to them in order to ensure that everyone was using the same figures and that decisions would not be influenced by errors in calculation. Included in the case study was an explanation of the accounting change that had taken place, and it was stressed that there had been no change in the pattern of costs or their incurrence. In short, all financial statements contained sufficient information, whether disclosed in the body of the report or by way of a note attached to it, to allow the recipients to convert the figures and re-state them under whichever accounting methods they considered to be most relevant. Thus subjects were not obliged to base their decisions on the “total cost” figure reported, although the principal hypothesis was that they would tend to do so. See Appendix 2 for the case study details. On the basis of the statements presented to them the subjects were asked to state the minimum acceptable price for which they would undertake the work together with their calculations. The two experimental groups were eight managers from H and seven managers from C. Initially the H group consisted of ten managers, but had to be reduced to eight as two responses were unusable. A second case study was sent to all the fifteen subjects who had replied to the first. This case was the same as the first in all particulars except that subjects received a clear explanation of a change in accounting method and those who had received full cost data project specifications in the first case study now received direct cost data specifications, and, of course, those who had first seen direct cost data now received full costs data. Apart from the fact that the magnitide of all the cost figures had changed by a factor of 1.35 the only difference between the two case studies was the change in overhead method, the non-financial information being held constant. As in the first case study subjects were asked to state the minimum

8

PALL BARiiES and JOHN WEBB

acceptable price for which they would undertake the project. All fifteen subjects who received the second case study replied to it.

“efficient” decision-makers are those who made the same decision regardless of the accounting method used. Managers were deemed to be efhcient if their replies varied by less than dt,10. Also those replies where the overhead element W;LS included in the calculation are reported. The results in terms of the principal hypotheses are given below.

Analysis of results In order to be able to compare like with like it was necessary to divide the minimum acceptable price determined by subjects who had received direct cost information by 1.35 because the cost figures with which they had been provided were 35% higher than those provided in the full cost estimates. The replies of the subjects to the two case studies are set out in Table 1. It also shows the mean reply given by each of the two groups and the standard deviation. For each subject the reply to the direct cost case study as a percentage of the full cost case study is shown, as is the difference between the two as a percentage of the “full-cost” reply. The TABLE 1. Minimum

acceptable

prices

Full

Direct

(F)

CD)

assigned

Hypotbesis 1. That some managers will be fixated with the “total costs” figure and their decisions will be affected by a change in the overhead allocation method. The results show that six managers (40% ) exhibited no fixation in that their replies to the two case studies were consistent although the accounting methods used were different. Three managers (20% ) were fairly fixated in that although their replies over the two case studies

by subjects

D/F

in response

Absolute difference

to the two case studies

Efftcient decisionmaker

Subject number

c

Full 1.550 1,860 3,100

I

2 3 i 5 6 7

1,550 1.015

Average

1,550 2.355

2.963 1,556 2,827 2,200 1,600 1,666

Standard deviation

682

560

3,350 1,550 1,481

8 9 IO II

12 I3

14 I5 Average Standard deviation

Overhead costs included in calculation

.

1.550 2,895 2,500 3,279 2.981 1,556 1,364 2.98 I 2.488

1,550 2.020 2,703 3.279 2.98 1 1.550 2,166 2.98 I 2.304

627

718

1,oo

0.54 0.95 0.46 1.82 1.48 1.03

845 137 1.794 1,277 719 50 689

630 I .oo

-

0.69 I .OS 1.00 1.oo 0.99 1.58

875 205 -

I .oo

,

6 802 236

354

J x x x x x x

Direct x

/ / / /

; x x x

/

x

MANA<;I3~ENT INFOIIMATION

varied they consistently included overhead costs in their calculations whether they were reported in the body of the estimate or not. Six managers (40% ) were highly fixated: if overhead costs were shown in the body of the report they included them in their calculations, if such costs were not shown in the body of the report they excluded them from their calculations. This hypothesis classifies those managers who exhibitied fixation, and those who did not. In respect of those three who are seen as partially fixated, classification depends upon the exactness of the algorithm assumed in the case studies. If exactness is assumed, then those three managers are correctly grouped with the others who were more highly fixated. This is the view of the authors. On the other hand, as these three only varied slightly from the “no fmation” response they may be included with that group. However, the classification of this intermediate group does not affect the verification of the hypothesis. In either case the results support it: that some managers were efficient processors of information and were able to adjust their decision processes in response to accounting change so as to keep the decision output constant. How: ever other managers were not able to do so and exhibited varying degrees of fixation, their decisions being influenced by the change in the treatment of overhead costs. ff>lpotbesis 2. That managers will tend to try to recover from each project the full overhead costs allocated to that project because of their previous experience of doing so. The available evidence was not very conclusive, while six of the managers attempted to fully recover overhead costs on both occasions the other nine showed that on at least one occasion they were prepared to totally exclude the project overhead costs from their calculations. However, the average statement of “minimum acceptable price”, for all groups was greater when the project specification was based on full cost rather than direct cost data. H_]jpotbesis3. That managers from H will tend to be less fixated than those from C as they have

9

(:HAN<;liS

previously experienced a change in the overhead allocation method and that they have more experience in making commercial decisions. The results support this hypothesis. The average change in the figures assigned by members of the H groups (&236) were significantly lower than the average change in the figures assigned by members of the C groups (&689). Furthermore, while 62% (four) of H managers appeared to be efficient processors of information, and in this experiment they were not functionally fixated with the “total cost” figure, only 14% (one) of C managers efficiently handled the information and exhibited non functional fixation. The Students t-test and the rank sum test were used to see whether or not the sub-populations of H managers was significantly different from C managers. (That is, the medians of the two populations of subject responses were diIferent). Where population 1 is C managers and population 2 is H managers and CYis 0.05, the critical values of R are 39 and 73, for a two-sided alternative. Null hypothesis Alternative hypotheses

HOMl = M2 72.5 2 R 2 39.5 HlMl> H2MlC

M2 M2

Ra73 Rd 39.

As the sum of the ranks (R) is 73 the null hypothesis must be rejected in favour of Hl. Thus subjects from C are drawn from a population which makes a significantly greater reaction to a change in overhead allocation method than does the population from which the H sample was drawn. There is support for the hypothesis that H managers are, on the whole, less fixated than C managers. A concomitant issue to hypothesis 3 is: why did three subjects report minimum accepted prices below direct cost? Two were from H. Does this indicate ignorance to such an extent as to undermine the results? This does not seem particularly likely given the status of the subjects, although it underlines the exploratory nature of the research. In all three cases this arose in response to direct cost data: when pre-

PAUL BARVES and 10HN WEBB

10

order of importance. The results from this qucstionnaire are shown in aggregated form in Table 2. It would seem worthwhile to consider the mean grades and rankings assigned to the original seventeen factors by both the six “efficient” and the nine “inefficient” decision-makers: this analysis is also set out in Table 2. One might expect that subjects who were able to process accounting data efficiently would tend to regard accounting information as being important and would, therefore. tend to assign high grades to the financial factors which affect their decisions. A consideration of Table 2. however, suggests that the principal financial factors ( 11, 12, 13 and 14 ) are considered to be less important by efficient decision-makers than they are by inefficient decision-makers, judging by the grades and ranks assigned to those factors. It is difficult to explain why this should be. It may be that the more efficient decision-makers are used to manipulating accounting data and restating it in order to gauge more effectively the financial consequences of undertaking projects in pursuit of non-financial objectives such as providing challenging work for staff in a situa-

sented with full cost data the subjects recommended prices above direct cost. This indicates that perhaps the subjects thought overheads were included in the direct cost data. (The prices recommended are reconcilable with the case study cost data, given certain assumptions). In terms of hypothesis 3, subjects from C are more likely to make “errors” of this kind. (Perhaps in “a more important situation” they may be “more careful”).” Regarding hypothesis 1, their behaviour must be interpreted as strong, or extreme, fmation. Regarding hypothesis 2, the behaviour underlines the rejection of this hypothesis. The final part of the analysis of results involves an attempt to discover whether it is possible to identify any aspects of the managerial decision process that distinguish subjects who appeared to be efficient processors of information from those who seemed to be relatively inefficient processors. In order to do this it was necessary to refer back to the results of the questionnaire where subjects considered a number of factors which intluenced their decisions on commercial projects and were assigned grades and ranked in TABLE 2. A presentation

of the mean grades and rankings assigned by subjects “efficient”

Factor

L However

to decision

factors,

analysed by the groups of

decision-makers

Grade Efficient DMs

2

and “ineffkient”

Ranking Inefficient

5.83

5.56

DMs

Efficient DMs

IneffCrnt

7.25

9.00 +.17

7.33

8.22

6.75

4.83

7.11

10.00

7.22

4.00

4.00

13.25

11.83

5

9.00

7.44

2.58

5.67

6

8.83

7.77

2.83

4.67

5.50

6.22

7.50

7.00

8

6.67

7.44

6.00

6.1

9

6,17

7.44

7.92

10

5.50

4S8

8.67

6.33 10.28

11

4.17

4.88

10.42

12

1.83

4.00

15.42

I3 14

5.17

6.77

8.

4.11

15.25

15

2.33 6.50

16

5.00

5.33 6.56

10.50

10.39

17

4.00

5.00

12.58

11.72

see Abdel-Khalik

and Keller ( 1979)

which studied the behavior

I7

7.92

of bank loan officers.

DMs

I

10.39 14.56 8.22

Ii.00 I 1.14

MANACXMENT

tion of temporaq over-capacity. Indeed, manpower factors (5 and 6) are considered by el% cient decision-makers to be markedly more important than they are by inefficient decisionmakers. An analysis of the mean responses of the three efficient decision-makers who were concerned with direct cost recoveji, as compared with the responses of the three efficient decision-makers, who were concerned with full cost recovery, is not particularly illuminating. However, a couple of points are worth noting. Efficient decisionmakers who were direct-cost orientated appeared to be more concerned with profitability and the timing of cash flows, however they had the same low opinion of the importance of “contribution” as the full-cost managers did. It was interesting to see that the direct-cost orientated subjects showed a greater concern for the availability of resources (factors 6 and 7). Even if one discounts the fact that the sample is small, the above observations are far from being conclusive. Before commenting further on the grades and rankings assigned to the various factors by efficient and inefficient decision-makers it is worth considering the results of the tests of statistical TABLE J. Tests of the statistical

significance performed on the response of the two groups. As before a rank sum test was used. Here population 1 was the group of six efficient decision-makers and population 2 was the group of nine inefftcient decision-makers. (Y is 0.05. The rank sum critical values tables gives the critical values of R as 31 and 65. Therefore, for the assertion that for each factor response the IWO groups are drawn from the same distribution (i.e. the null hypothesis), the hypotheses may be stated as follows: Null hypothesis Alternative hypotheses

HO:M 1 = M2

Grade Hl:Ml P-M2

H2:MI


29.5

t-

HO:MI

= M2

13 I+ 15 16 I’

Ra65 RS31.

Rankings Hl:MI >M2

decision

H2:Ml

makers

CM2

41 62.5 57 57

6’

3’ 51.5 -42.5 35.5 36.5 39 59.5 38.5 -41

HlzM2 > M2 H2zMlC M2

The sum of the ranks (R) for population 1 was calculated for both grades and rankings assigned to each of the seventeen factors. There were only two factors out of the seventeen for which the efficient decision-makers assigned significantly difTerent grades to those assigned by inefflcient decision-makers, these being: factor 3: compatability with the division’s future commercial work; factor 5: the intellectual stimulus to attract and keep good stafT

51 36

8 9 10 11 12

HO:Ml = M2 64.5 2 R b 31.5

signficance of grades and rankings assigned by efficient and inefficient seventeen factors intluencing the commercial project decision

Factor

56.5 ii.5 39

I1

fNF<)RMATfON CfiANGfib

30 37 52 46.5 54 43 46.5 52.5 49.5 56 36.5 50 51.5

fo

12

PALL BARNES andJOHN

Although the grades assigned to factor 3 b) efficient decision-makers appeared to be significantly lower than those assigned by inefflcient decision-makers, the test of the rankings assigned, which are the best measure of importance (or perceived importance), did not show that the overall responses were insignificantly different. It is only when one considers factor 5 that both the grades and rankings are unambiguous. The efficient decision-makers regard it as being significantly more important than do the inefficient decision-makers. It would appear, therefore, that a concern for finding challenging employment for his staff in a period of overcapacity may be one of the factors that distinguishes the relatively efficient decision-maker from the less efficient decision-maker. Of course, it is possible to speculate in order to explain the apparent paradox that managers who have shown themselves able to handle accounting data in a manner which may be considered to be efficient, expressed a lower opinion of the importance of financial factors than did the relatively inefficient decision-makers. One possible explanation is that efficient managers who have already decided, on scientific grounds, that they would like to undertake a particular project may then regard the financial factors as being relatively unimportant and learn to manipulate the accounting data, which of course emphasises the financial factors, so as to allow them to undertake the project in question.

DISCUSSION AND CONCLUSIONS We have distinguished between functional fmation as conceived by psychologists and that usually conceived by accounting researchers. It is our view that both of these have relevance to information systems and this paper presents some empirical evidence concerning both. Our study was of actual decision makers who were presented with case studies similar to practice on which they had to make decisions. Most of the subjects exhibited tinctional fixation in the Ijiri ef aC. sense, i.e. they were fixated by the total costs figure in that they altered their project

KEBB

prices in response to a change in reported costs caused bp a measurement change (hypothesis 1). A major explanation for this appears to be in terms of previous experience of an accounting change (hypothesis 3 ). We also looked for functional fixation in the original psychological sense (hypothesis 2). Here we hypothesised that subjects would try and recover overhead costs. even though they were instructed that this was unnecessary. simply because they were used to doing so. The results were inconclusive. That there was no evidence for functional Axation in the psychological sense is slightly strange given the unanimity of the psychological research concerning objects. However it should be pointed out that intelligence has been found to mitigate fmity (see Luchins & Luchins. reprinted in Watson & Laird [ 19681 mentioned in the introduction). Here the subjects were highly experienced and intelligent scientists. Also the new task required was relatively simple and hints were given (note Saugstad & Raaheim [ 19601 mentioned in the introduction). The final part of our study attempted to. distinguish between those subjects who exhibited functional fixation and those who did not, in terms of their managerial objectives and qualities. It would appear that those who were not fixated were less concerned with financial matters than their colleagues, also they were more concerned with providing an intellectual stimulus for their staff Two groups appear therefore: those who can see around “trivial” financial matters and are concerned with “higher matters” and those who are not. The implication again is that intelligence mitigates fixity. We may distinguish between two methodologies in the functional fixation empirical studies. In the “one-object” approach two subjects are given a problem whose difficulty lies in the fact that a well-known object is to be used in a novel or new way in the solution. Functional fixation expresses itself by a smaller number of solutions in the group of subjects to whom the usual function of the object is accentuated. In approach two objects are the “two-object” equated by means of a control group which is given a problem requiring the use of either of the

MANA(;EMENT

INFORMATION

objects in a new or novel function. Functional fixedness. in this case, expresses itself in a tendency by the subjects to use that object in the critical problem whose function has not been accentuated. The present study, along with the other accounting studies cited, is of the first type. But as Flavell et al. ( 1958) wrote While functional fixedness in the first cast is a mattrr of solution vs non-solution ., it is. in the second cast. a matter of choice of objects or mrans for the solution of a comparatirrly simplr problem. It is to br expected that the last method is thr one that gives the purest measure of functional fixednrss. In the first method a difhcult problem is used and the non-solution of this problem may very’ well bc attributed to other factors than functional fixation.

In the present study the variation in subjects’ behaviour may to some extent (and somehow ) be explained by variations in their objectives. Although it was attempted to prevent this in the case studies presented to subjects, this was apparent in the results and suggested as “motivating factors” in the second part of the study. These methodological alternatives are mentioned as suggestions for further research. However, they also identify a particular emphasis in the original hypothesis. It seems unnecessary to suppose a “fixation” with a specific function just because an object, a report, data, or whatever, has once been used in a certain way. It is rather to be supposed that the use of an object, or whatever. in its normal and usual function infhtences the perception of it. Its properties recede into the background in favour of its use. Jensen ( 1960 ) writes: One‘s knowledge firmly established

of the thing and of its normal use is so that an accidental application of cer-

CHAN<;liS

15

tain IKss Kssential matKrial propertil-s will not result in much of a change in one’s relation to it. As soon ah a situation is presented which appeals to the normal function of the object it regains its tool characters - slips back into order again.

Of course these remarks referred to a special class of well-known objects. In many accounting contexts this is particularly relevant with routinised reports and data and well known and conventional accounting statements. It is suggested, therefore, that in addition to extending the functional flxation hypothesis to include the original concept used by psychologists, and using the “two-object” approach in empirical studies, that a more phenomenological approach be used. The perceptual effects of the past use of an object could be usefully considered. Functional fixation is largely concerned with problem-solving behaviour; a concomitant aspect is how the perception of the object, or whatever, is infhtenced by the past experience of it. This study and the empirical studies have concentrated upon whether decision makers have behaved in this way. Little attention has been given as to why (although inquiries into circumstances and characteristics go some way). Behavioural fixation could therefore be usefully supplemented in terms of inquiring into perceptual organisation. To quote Jensen ( 1960). Over against the expression “functional fixedness” might be put “perceptual emphasis” as a description of the effect of the accentuation of functional properties of things. Or possibly we might use “functional fmedness” to refer exclusively to the observable event and “perceptual emphasis” to refer to the underlying psychological process.

BIBLIOGRAPm hhdcl-Rhalik. A. R. & Rrller. T F.. Earnings or Cash Flows: An Experiment on Functional Fixation and the Valuation ofthr FirmStz&ies ir?Accozrntin~ResearcbNo. 16( American Accounting Association. 1979) Adamson. R. E.. Functional Fixation as Related to Problem Solving: A Repetition of Three Experiments. .lowunl of E.~petYmelJtnt Pq*cbcholog~~ ( October 1952 ) pp. 28R-9 1. Adamson. R. E. K1 Taylor. D W.. Functional Fixedness as Related to Elapsed Time and to Set, Joumnl of E.vpe,JmrrJtc~lPq~cholo~~*(February 19% ) pp 122-26.

l-1

PALL BARNES and JOHN WEBB

American Accounting Association. Report of the Committee on Human Information Processing. Commifter Reports ( 19’8) American Accounting Association, Anderson. J. A.. The Taxi Case: A Shift in Target Audience and the Selection of a Reportmg Base in Sterling. R. R. and Thomas. A. L. (cds)Accountingfora SimplifiedFirm Outing Depreciable.4ssets. pp. 14%162 (Scholars Book Co.. 1979) Ashton. R. H., Cognitive Changes Induced by Accounting Changes: Experimental Evidence on the Functional Fixation Hypothesis, Journal ofAcounting Research (Supplement, 19’6) pp. I- I-. Beaver, W. H., The Behaviour of Security Prices and its Implications for Accounting Research llethods. Tbeheccounting Review (Supplement 1972) pp. tO’-43’. Beaver, W. H.. Implications ofSecurity Price Research for Accounting, A Reply to Bierman. T/~Accor~!fli~g Review (July 1974 j pp. 563-5’1. Bierman. H.. Jr. The Implications to Accounting of Efficient Markets and the Capital Asset Pricing .\lodcl. ~~heAccounli?zg Review (July 1974) pp. 557-62. Birch, H. G. & Rabinowitz, H. S.. The Negative Effect of Previous Experience on Productive Thinking. Journal of Experimental Psychology (February 195 1) pp. 12 l-25. Birnberg. J. C. & Nath. R.. Implications for Behavioral Science for Managerial Accounting, Tbedccounting Review (July 1967) pp. 468-479. Bloom. R., Elgers. P. T. & IMurray, D., Functional Fixation in Product Pricing: a comparision of Individuals and Groups, Accounting Orgnizutions andsociety ( 1984) pp. l-l 1 Change, D. L. & Birnberg, J. G.. Functional Fhity in Accounting Research: Perspective and New Data. Journal of Accounting Research (August 1977) pp. 300-j 12. Duncker, K, On Problem Solving, PsycbologiculMoonogruphs ( 1945) pp. l-l 13. Dyckman. T. R., Gibbins. M. & Swieringa, R. J.. Experimental and Survey Research in Financial Accounting: A Review and Evaluation, in Abdel-Khalik, A. R. and Keller. T. F. (eds) TheImpact ofAccounting Research on Practice and Disclosure pp. 48-105 (Durham, NC: Duke University Press. 19’8) Dyckman. T. R., Hoskin. R. E. & Swieringa, R. J.. An Accounting Change and Information Processing changes, Accounting Orgunisutions andSociety (1982) pp. l-l 1. Findlay, M. C.. On Market Efficiency and Financial Accounting, A&US (Summer 1978) pp. 106-l 2 1. Flavell, J. H., Cooper, A. & Loiselle. R. H.. Effect of the Number of Preutilisation Functions on Functional Fixedness in Problem Solving, Psychological Reports (June 1958) pp. 34_+?50 Glucksberg, S. & Danks. J, H., Functional Fixedness: Stimulus Equivalence Mediated by Semantic-Acoustic Similarity, Journal of Experimental PsycboIogy (July 1967) pp. 400-405 tionedes, N. J,, Risk. Information and the Effects ofspecial Accounting Items on Capital ,Market Equilibrium. Journal ofAccountingResearcb (Autumn 1975) pp. 220-256 Hammond, K R. & Summers, D. A., Cognitive Control. Psychological Review ( 1972) pp. 58-67 Hammond. K R., Summers, D. A. & Deane, D. H., Negative Effects of Outcome-Feedback in MultipleCue Probability Learning, Organisational Bebaviour andHuman Performance ( 1973) pp. 30-34 Ijiri. Y. & Jaedicke. R. K, Reliability and Objectivity of Accounting Measurements. Working Paper No. 55. Graduate School of Business, Stanford University (April 1966). reprinted in The Accounting Revieut (July 1966) pp. 474-483. Ijiri, Y.. Jaedicke, R. K. and Knight K E., The Effects of Accounting Alternatives on lMamtgement Decisions. in Research in Accounting Measurement Jaedicke, R. L.. et ul. (cd.) pp. 186-99 (Chicago: American &counting Association, 1966) Jam. T. N., Alternative Methods of Accounting and Decision Making: A Psycho-Linguistical Annalysis, The Accounting Review (January 1973) pp. 95-104. Jensen. R. E.. An Experimental Design for Study of Effects of Accounting Vdriations in Decision-IMaking. Journal of Accounting Research (Autumn 1966) pp. 224-X Jensen, J,. On Functional Fixedness: .Some Critical Remarks, Scundinnviun Journal ofPqx%otogy (Winter 1960) pp. 15742. Joyce, E. J.. Individual Judgement in Audit Program Planning: An Empirical Study, Doctoral dissertation. University of Illinois ( 1976) Libby, R., Discussion of Cognitive Changes Induced by Accounting Changes: Experimental Evidence on the Functional Fixation Hypothesis (Supplement, 1976). Journal of Accounting Research pp. 18-24 Libby, R.. Accounting and Human Informution Processing: Tbeoty und Applications (Englewood Cliffs: Prentice-Hall, 1981 ) Livingstone. J. L.. A Behavioral Study ofTax Allocation in Electric lltility Regulation, TheAccounting Review (July 1967) pp. 544-552

MANAGEMENT

INFORMATION

CHANGES

Luchins. A. S. & Luchins. E. H.. New Experimental Attempts at Presenting Mechanisation in ProblemSolving. Reprinted in Watson. P. C and Johnson Laird. P. N. (rds.) Thinkin~q and Reusoning Selected Readings, pp. -12-G ( Hammondsworth: Penguin. 1968 ) Maicr. N. R. F.. Reasoning in Humans. Il. The Solution of a Problem and its Appearance in Consciousness, Journal of Compuratit~eand Physiological P~ycbolog~~ ( 193 1) pp. 18 1-I 94. Mlynarczyk. F. A. Jr.. An Empirical Study of Accounting Methods and Stock Prices, Empirical Research in Accounting: Selected Studies, Journuf oJAccounting Reseurch (Supplement 1969) pp. 6.341. Pearson, D. B.. Discussion of Cognitive Changes induced by Accounting Changes: Experimental Evidence of the Functional Fixations HypothcsisJoumul ofAccounting Reseurch (Supplement 1976) pp. 25-28. Ridway. \:. F.. Dysfunctional Consequences of Performance Measurements, Administrutiw Science Quarter@ (September 1956) pp. 240-24’. Saugstad. P. and Raaheim, K.. Problem-Solving. hSt Experience and Availability of Functions, British Journu/ 0f~S@70/O~J,gl’ ( May 1960 ) pp. 9’104. Simon, H. A.. Models of Man: RationaliQ~ and Administratiw Decision-Muking (New York: John Wiley. 195’) Swieringa. R. J.. Dyckman. T. R. 81 Hoskin, R. E.. Empirical Evidence about the Effects of an Accounting Change on Information Processing, in Burns, T. J, (ed. ) Behaoioral Experiments in Accounting II pp. 225-259 (Columbus: College of Administrative Science. The Ohio State University, 1979) Thomson, R.. The Pq~hologgggggggggggggggggggggggggggggg~ of Thinking (Harmondsworth: Penguin Books, 1959) Yeomans. K. A.. Statistics for the Social Scientist: 2 Applied Statistics, (Harmondsworth: Penguin Books, 1968)

I5

PALL BARNES andJOHN

16

APPENDIX ofcommitment

1. FACTORS PERTINENT

WEBB

TO COMSIERCML

DECISIONS

(1)

Duration

to the project.

(2)

Compatability

(3)

The view ofwhere

it is intended

the Division will go in the future with regard to its commercial

work.

(+)

The view ofwhere

it is intended

the Division will go in the future with regard to its vote-funded

work.

(5)

The desire to undertake std.

(6)

Availability

of manpower

to work on the project.

(7)

Availability

ofmachinery,

workshop

(8)

The customer (e.g. whether goodwill and attract further

(9)

The desire to undertake

work which will enhance

(10)

The risk of the customer

being unable to fultil his contractual

(11)

The expected

(12)

The timing of cash flows (i.e. phasing

(13)

The operating

(14)

The size of the “contribution”

to Overheads

(15)

The total revenue

to net revenue)

(16)

The possibility customers.

that the project

under consideration

will yield information

marketable

(17)

The possibility

that the project

under consideration

will yield information

valuable

ofproposed

project

to Division’s (Group’s)

work which will provide

profitability

current

an intellectual

areas ofwork

stimulus

and expertise.

and consequently

will attmct

and keep good

space, etc.

in the public or private sector) work to the establishment.

and whether

the Laboratory’s

doing this work for them will build up

reputation.

obligations.

of the project.

risks involved

(as opposed

of receipts

(of receipts

and expenditure

by financial

being less than budgeted,

or expenses

and Protit (i.e. Receipts-

years). being greater

than budgeted

).

Direct Costs’ ).

arising from the project. to other commercial

to ongoing,

vote-funded

work.

l “Direct Costs” -costs charged direct to projects and which vary directly with the amount of work done, as opposed indirect costs which are re-allocated or apportioned e.g. overheads. Other factors influencing decisions (please list, grade, and rank them): Subjects were asked to grade each factor’s importance on a scale O--10. They were also asked to rank them in order importance.

to

of

MANAGEMENT

APPENDIX Managers

were presented

with case studies.

INFORMATION

CHANGES

17

2. ABRIDGED CASE STUDIES

The enclosing

letter stated that they:

incorporate certain changes and details of a project specification containing both financial and non-financial information. The aim of the exercise is for you to determine the minimum acceptable price at which you would recommend undertaking the work. This is not therefore a pricing exercise, it being assumed that market forces will determine how much the prospective customer is prepared to pay. This deliberately simplitied case may or may not provide a realistic indication of your Division’s (Group’s) current state. Furthermore you may find that the overhead rates applied differ from your own rate, and that the size of the project is smaller/larger than you are accustomed to dealing with, this is inevitable as I am contacting a number of people at both C and H. I should be grateful therefore if you would overlook these problems and consider the way you would respond to this situation in the event that it did confront you. 1would also point out that there is no one “correct” figure for the “minimum acceptable price”. Attached

were the following

statements:

Criteria for-project selection. Because of over-capacity in your programme area, and the consequence this is having both for the level of receipts from external customers and the morale ofstaffat all levels, you have been given permission by Senior Management to undertake a certain amount of work at less than full cost (where full cost is defined as the sum of Direct and Indirect Costs). However, any commercial work undertaken must mlfil the following criteria: ( 1 ) Receipts must at least cover the Direct Costs. Any surph~s receipts over and above this level will go towards the Bnancing of costs which are Rxed and are essentially independent of the level of activity, and which includes Divisional Overheads. General Overheads. Commercial Overheads. Clearly, in the event that these Indirect Costs are also covered. any further balance will give rise to recovery of TDR and profit. ( 2 ) The work must be completed within the current financial year and must not involve men and resources that have been transferred off ongoing work, whether vote or commercially funded. Project specification. A U.K. customer has requested that a piece of work be done which is likely to prove interesting to members of your stalfand which falls within the area of work with which the Division (Group) would like to involve itself in the future. The proposed programme of work should be completed fairly comfortably before the end of the financial year and can be undertaken without exceeding your manpower or financial budget. It is not expected that the satisfactory completion of this job is likely to attract significant amounts ofwork to the establishment in the future; however it may serve towards assisting the gradual enhancement of the laboratory’s reputation. A member of your staff has produced an estimate of expenditure (you may assume that the estimate is a reasonable one, the technical contingency is adequate and appropriate allowances for inflation have been incorpordted into the individual tigures), the details are shown over the page. Because of the comparatively short duration of this work it is considered extremely unlikely that true actual cost of the work will exceed the estimate by a signiticant amount. The customer is a company of high standing and the chance of its defaulting from any contract it signs may be regarded as nil. Bearing in mind your current problem of under-utilisation of both men and resources, you are asked to state the minimum price at which you would accept the work (the price being regarded as fixed), and to provide a brief explanation of how you determine this Bgure. There are at present no alternative customers who would place work. in the event of the proposed job being rejected. The minimum acceptable price will not determine the price actually charged, as this will be based on “what the market will bear”. The Managers were presented with a second case study. The enclosing letter stated: You will notice that the true criteria for project selection for this case have not changed and that the nature of the project in question is similar to the first one. both in terms of the type of technical input required and the duration. You may consider that the project featured in the first case study was not undertaken because the customer withdrew before discussion on the contract price had started. There was a similar statement concerning criteria for project selection. As is mentioned in the text. each manager eventually received both full cost data and direct cost data. Some received full cost in the first case study and direct cost in the second. The other managers received these statements in the reverse order.

18

PAUL BARNES and JOHN WEBB

Both H and C subjects received case studies essentially overhead allocation system. These were:

the same but the format of the estimates

Full costs

w9s tailored

to the prevailing

Direct costs X I .35

H &855 325 60

C &855 325 60

25% Contingency

1.240 310

1,240 310

1.6-t 118

Direct costs Total costs

1.550 -

1,550 -

-

-

2,092

2.092

170 685

1,155 -

635 925

-

2,705

2.705

-

-

51 I’ 8256

516i -

To those who had received

direct

( 1) Wages and Salaries (2) Purchases (3)Stores

Add indirect costs Overheads ( 135% of 1 above) Divisional Overheads (55% of 1 above) General Overheads Total Costs

T.D.R. Commercial

3% 7%

overheads

In the second case study a note was attached costs in their first case study the note was:

as to the change

of reporting

Change in the method of preparing accounting reports Management has decided to reverse its decision. (as outlined in projects. This return to a basis of Full Costing will mean that once to projects, but they will be shown separately from Direct Costs in accounting method does not reflect any change in the pattern way invalidate the criteria set out on the preceeding page. Estimates are in future to be prepared on a Full Costing Basis. To those who had received

4 112% overheads.

H 51.15* +39 81

-

C bl.lii -t39 HI 1.6’4 i18

I.%0

the previous case study) to charge only Direct Costs to again Indirect Costs, such as Overheads. will be charged in accounting reports and estimate forms. This change of activity or the incurrence of costs, nor does it in any

full costs in their first case study the note was:

Change in the method of preparing accounting reports There has been a change in the method of financial reporting. From now onwards only Direct Costs are to be charged to projects, as these costs vary directly with the amount ofwork done. Indirect costs, including Overhead costs, are not now charged to projects as they are fmed in amount; that is. they do not vary with the level ofoutput. Instead they are accumulated and shown as a lump sum in the frnal accounts, This change in accounting method does not reflect any change in the pattern of activity or the incurrence of costs. Estimates are in future to be prepared on a Direct Costing basis, although the appropriate proportions of the various overhead costs are known.