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Distorted Cost Allocation: An Encouragement or Discouragement?

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초록

Firms allocate divisions overhead costs, to provide information for management decisions (information perspective) and create incentives to control costs (motivation perspective). They occasionally distort (over- or under-allocate) cost, so that the allocated cost is deviated from the optimal level for which divisions are expected to be accountable (hereafter, cost distortion). We study the impact of cost distortion on divisional performance and firm performance. We find that both over- and under-allocation discourage divisional managers from improving their subsequent performance and that cost distortion negatively affects the overall firm performance. Our findings suggest that for motivation and decision-facilitating purpose, it is desirable that overhead costs are allocated at an anticipated level.

Abstract

Firms allocate divisions overhead costs, to provide information for management decisions (information perspective) and create incentives to control costs (motivation perspective). They occasionally distort (over- or under-allocate) cost, so that the allocated cost is deviated from the optimal level for which divisions are expected to be accountable (hereafter, cost distortion). We study the impact of cost distortion on divisional performance and firm performance. We find that both over- and under-allocation discourage divisional managers from improving their subsequent performance and that cost distortion negatively affects the overall firm performance. Our findings suggest that for motivation and decision-facilitating purpose, it is desirable that overhead costs are allocated at an anticipated level.

참고문헌 (45)

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