An Experiment in Federal Cost Accounting and Performance Measurement

Article excerpt

Recent events place management accounting at the intersection of a number of emerging agenda at the world's largest and most complex organization. The 1992 presidential election focused attention on governmental management. The National Performance Review is pursuing management improvement, and Congress is debating performance based budgeting. Federal agencies are reviewing management practices, systems and accounting in response to the Chief Financial Officer Act (H.R. 5687) mandate for "fundamental reform in financial management requirements and practices."

A role of increased importance seems clear since management accounting supports the information needs of those "engaged in managing the undertaking (Crowningshield, 1969)." Many accounting academics, however, feel that management/cost accounting has little to offer public sector organizations unconcerned with profit making.

This research investigates the usefulness of cost accounting in government by installing an activity based cost system at a federal organization operating without cost data, but with strong non-financial measurement systems. The study documents three pre-experiment management practices, describes the informational intervention and reports changes in management actions and perspectives. The results suggest that cost information provides management with significant new insights into cost reduction, resource deployment, process improvement and line-to-staff interfaces.

THEORY AND BACKGROUND

Explanations for the current lack of governmental management accounting emphasize the differences between public and private sector due to the government's service nature and lack of profit motivation (Schattke and Jensen, 1981 and Anthony and Herzlinger, 1975). Horngren and Sundem (1990) argue that the lack of clear organization goals, the presence of professional employees and the difficulty in measurement of accomplishments create an inhospitable environment. They conclude that "control systems in nonprofit organizations will never be as highly developed as in profit seeking organizations (page 289)." They recommend the study of management accounting to nonprofit managers as an aid in their personal investments and interactions with businesses!

Yet, many private sector organizations do use management accounting and the value of cost computation, containment and control is increasingly apparent in the public sector. Birnberg and Gandhi (1976) and Helmi (1987) cite the important contribution of cost accounting in the administration of social programs. The value of accurate cost information has been recognized in privatization decisions (London, 1990), program control and performance improvement (Nestor, 1979), planning, programming and decision making (Caldwell and Welch, 1989) and fee setting (Dierks, 1978).

Why do organizations use management accounting? Accounting theorists cite the advantages of dollar based metrics in explaining the existence of accounting systems. Sterling, (1961) recognizing accounting's role in enabling comparison, notes the greater precision of numbers, and the additive nature of monetary values. Johnson (1991) also notes the ability of internal accounting systems to simulate external market forces thereby capturing market efficiencies within the organization.

Simon, et al, (1954) found monetary evaluation useful in promoting increased cost consciousness and promoting continuous improvement. This study extends this literature by comparing "before" and "after" observations of a single, public sector organization's management decision making after the introduction of a cost accounting system.

SITE SELECTION AND DESCRIPTION

The Examinations Division of the Internal Revenue Service (IRS) Boston District was selected for this research. The IRS met criteria for having a typical funding environment and well developed non-financial information systems. Non-typical funding environments, such as revolving funding, seem to have greater incentives for cost system needs (Geiger, 1993). …