Noncontrollable Costs and Responsibility Accounting.

An important characteristic of management control systems is the use of responsibility accounting. As Baiman [1982, p. 197] notes: "Responsibility accounting states that a person should be evaluated only on the basis of those factors that he controls. This is usually interpreted to mean that a person should be evaluated only on the basis of those outcomes that he affects [emphasis in the original]." This notion gives rise to the desire to distinguish between controllable and noncontrollable costs because the latter presumably should not be used to evaluate an individual's performance. For example, Solomons [1965, p. 83] states that "It is almost a self-evident proposition that, in appraising the performance of divisional management, no account should be taken of matters outside the division's control." However, this interpretation of responsibility accounting is often violated in practice. For example, we often observe a division manager who has profit responsibility for his division being evaluated and compensated on the basis of his division's capacity costs, over which he exercises no control. In this paper, we reexamine the process of constructing performance evaluation and compensation measures with the purpose of providing a possible rationale for why managers (hereafter, agents) are evaluated and rewarded on the basis of costs over which they exercise no control. We do so within a principal-agent context. [ABSTRACT FROM AUTHOR]