The Pure Rate Variance

The direct material cost variance can be subdivided into a price variance, a quantity variance and a price-quantity interaction variance. The price-quantity interaction variance is rarely mentioned in the literature because the traditional price variance does not acknowledge an interaction variance. For a number of pragmatic reasons, this approach may be justified for the direct material price variance. The direct labor cost variance is conceptually similar to the direct material cost variance. Accordingly, the traditional direct labor rate variance also includes a rate-efficiency interaction variance. However, the justifications for incorporating the interaction variance into the direct material price variance do not apply to the direct labor rate variance. This paper explores the possibility of separating the rate-efficiency interaction variance from the direct labor rate variance. This approach may be more aligned with the concept of responsibility accounting than the traditional method of calculating the direct labor rate variance. Thus, it may provide more reliable information feedback for decision-making purposes

Miller's (2009) WACC model: An extension

Miller (2009a) presents an analysis of the weighted average cost of capital WACC model. The paper attracts debate which uses a variety of repayment schedules to support the arguments raised. We present an extension of Miller's (2009a) WACC model in a world where interest is tax deductible and debt principal is paid at maturity. We also present the corresponding model for the required rate of return on levered equity which is a vital input to the WACC model. Since these models are unwieldy, we explore an alternative definition of the WACC. These models provide insights into the debate on Miller's (2009a) paper

A note resolving the debate on “The weighted average cost of capital is not quite right”

Miller (2009a) derives a weighted average cost of capital for the special case where the cash flows to equity and the cashflows to debt are annuities. The paper attracts debate. We show that the weighted average cost of capital is redundant in a world where interest paid is not tax deductible. The required rate of return on unlevered equity will consistently and reliably estimate the net present value of any project no matter the idiocyncratic beliefs of the analyst as to the year-by-year leverage of the project, or of the firm. We recommend that the weighted average cost of capital method is discarded. Our recommendation also applies to a world where interest paid is tax deductible

Analysis of Change in Present Value Measurements

In recent years, the leading standard setters for financial reporting have shown an increasing preference for fair value measurement. However, present value is often the only acceptable method of estimating fair value and therefore the actual result of the swing to fair value is likely to be increased use of present value in financial reporting. This paper addresses the issue of interpretation of a change in present value between successive reporting dates and shows that the change can be analyzed by use of the familiar variance analysis framework widely used in management accounting

Performance Measures and Short-Termism: An Exploratory Study

We examine the relationship between performance measurement systems and short-termism. Hypotheses are tested on a sample of senior managers drawn from a major telecommunications company to determine the extent to which the diagnostic and interactive uses of financial and non-financial measures give rise to short-termism. We find no evidence to suggest that the use of financial measures, either diagnostically or interactively, leads to short-term behaviour. In contrast, we find a significant association between the use of non-financial measures and short-termism. Results suggest that the diagnostic use of non-financial measures leads managers to make inter-temporal trade-off choices that prioritise the short term to the detriment of the long term, while we find interactive use is negatively associated with short-termism. We find an imbalance in favour of the diagnostic use over the interactive use of non-financial performance measures is associated with short-termism. Overall, findings highlight the importance of considering the specific use of performance measures in determining the causes of short-termism

Examining a positive psychological role for performance measures

Emerging evidence suggests that management control systems may generate positive psychological effects, leading to higher levels of managerial performance. We extend this literature by examining the extent to which (1) financial vis-à-vis non-financial measures and (2) diagnostic vis-à-vis interactive utilisation of performance measures may be associated with decreasing role ambiguity and increasing psychological empowerment with performance as the ultimate outcome variable. We find that the interactive utilisation of non-financial performance measures can be particularly important for generating a positive psychological experience and (indirectly) increasing performance. Our study contributes further evidence of the psychologically beneficial role played by management control systems

Are economic profit and the internal rate of return merely accounting measures?

This paper explores the proposition that economic profit and the internal rate of return are merely accounting concepts. They share a number of common aspects. These include an allocation of capital that is unrelated to market forces and a treatment in the literature that focuses on the mathematics rather than the economics. We show that the two measures have limited, if any, economic content. Therefore we conclude that they are devoid of compelling theoretical interest in the domain of wealth maximization.peer-reviewe

Classification of foreign operations for financial reporting

The New Zealand standard on foreign currency translation (FRS-21), similar to standards in the US, Australia, and Canada and the International Accounting Standard (IAS-21), requires the classification of foreign operations for translation purposes into two mutually exclusive types: integrated or independent. In judging whether a foreign operation is either integrated or independent, the accounting standard requires the evaluation of five qualitative factors. The standard neither describes the judgement process nor identifies the relative importance of the determining factors. It has been asserted that the lack of clarity in the standard on foreign currency translation may yield dissimilar results for firms whose circumstances are similar and consequently may reduce the comparability of financial statements across firms. Using a repeated measures design, this paper examines the judgement of preparers of financial statements (New Zealand financial controllers) in determining the designation of foreign operations for translation purposes. The results indicate that the relative importance of the determining factors is marginally unequal. No support is found for the assertion that the use of qualitative factors in accounting standards results in dissimilar judgements (lack of consensus) across respondents. Further, the results show that the subjects demonstrated consistency and self-insight in their judgements. Further, the results indicate that the judgements of respondents are not biased toward either classification of foreign operation. This may suggest that the observed bias may be motivated by economic factors rather than the outcome of using the qualitative cues in the accounting standard. When the respondents were debriefed, several of them identified ‘managerial independence’ as another determining factor that has not been included in the NZ standard

Daily weather effects on the returns of Australian stock indices

The effects of the weather in Sydney on the daily returns of two stock indices of the Australian stock exchange are investigated. Three factors capture the essence of daily variations in temperature, cloud cover and wind speed. Two steps are taken to increase the efficiency of the statistical tests. First, control variables are incorporated in the regression models to abstract systematic variance from the error terms. Second, a repeated measures design is used to estimate the standard errors of the slope coefficients. The returns of the stock indices are uninfluenced by wind speed and cloud cover. However, the returns of the two stock indices are negatively influenced by the temperature in Sydney. There is evidence that deseasonalized temperature has a stronger negative influence than the level of temperature.