Cost Accounting (14th Edition)

PROBLEM FOR SELF-STUDY 413
Resolving the conflict between the decision model and the performance-evaluation
model is frequently a baffling problem in practice. In theory, resolving the difficulty seems
obvious: Design models that are consistent. Consider our replacement example. Year-byyear
effects on operating income of replacement can be budgeted for the two-year planning
horizon. The manager then would be evaluated on the expectation that the first year
would be poor and the next year would be much better. Doing this for every decision,
however, makes the performance evaluation model very cumbersome. As a result of these
practical difficulties, accounting systems rarely track each decision separately.
Performance evaluation focuses on responsibility centers for a specific period, not on
projects or individual items of equipment over their useful lives. Thus, the impacts of
many different decisions are combined in a single performance report and evaluation
measure, say operating income. Lower-level managers make decisions to maximize operating
income, and top management—through the reporting system—is rarely aware of
particular desirable alternatives that were not chosen by lower-level managers because of
conflicts between the decision and performance-evaluation models.
Consider another conflict between the decision model and the performance-evaluation
model. Suppose a manager buys a particular machine only to discover shortly thereafter
that a better machine could have been purchased instead. The decision model may suggest
replacing the machine that was just bought with the better machine, but will the manager
do so? Probably not. Why? Because replacing the machine so soon after its purchase will
reflect badly on the manager’s capabilities and performance. If the manager’s bosses have
no knowledge of the better machine, the manager may prefer to keep the recently purchased
machine rather than alert them to the better machine.
Chapter 23 discusses performance evaluation models in more detail and ways to
reduce conflict between the decision model and the performance evaluation model.
Decision
Point
How can conflicts
arise between the
decision model used
by a manager and
the performanceevaluation
model
used to evaluate
that manager?
Problem for Self-Study
Wally Lewis is manager of the engineering development division of Goldcoast Products.
Lewis has just received a proposal signed by all 15 of his engineers to replace the workstations
with networked personal computers (networked PCs). Lewis is not enthusiastic
about the proposal.
Data on workstations and networked PCs are as follows:
Workstations Networked PCs
Original cost $300,000 $135,000
Useful life 5 years 3 years
Current age 2 years 0 years
Remaining useful life 3 years 3 years
Accumulated depreciation $120,000 Not acquired yet
Current book value $180,000 Not acquired yet
Current disposal value (in cash) $95,000 Not acquired yet
Terminal disposal value (in cash 3 years from now) $0 $0
Annual computer-related cash operating costs $40,000 $10,000
Annual revenues $1,000,000 $1,000,000
Annual noncomputer-related operating costs $880,000 $880,000
Lewis’s annual bonus includes a component based on division operating income. He has
a promotion possibility next year that would make him a group vice president of
Goldcoast Products.
1. Compare the costs of workstations and networked PCs. Consider the cumulative results
for the three years together, ignoring the time value of money and income taxes.
2. Why might Lewis be reluctant to purchase the networked PCs?
Required