Accounting Research Center, Booth School of Business, University of Chicago

An Empirical Study of the Role of Accounting Data in Performance Evaluation

Author(s): Anthony G. Hopwood
Reviewed work(s):
Source: Journal of Accounting Research, Vol. 10, Empirical Research in Accounting: Selected
Studies 1972 (1972), pp. 156-182
Published by: Wiley on behalf of Accounting Research Center, Booth School of Business, University of
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 An Empirical Study of the Role of
AccountingData in Performance
Evaluation

ANTHONY G. HOPWOOD*

Accountingsystemsare oftenthe most importantformal sources of

informationin industrialorganizations.They are designedto provide all
levels of managementwithtimelyand reasonablyaccurateinformation to
help them make decisionswhich are in agreementwith their organiza-
tion's goals. It is thereforesurprisingto findreportsthat managers,in
adapting to accountingsystems,deliberatelyfalsifythe data and make
decisions which may be detrimentalto the long-terminterestsof the
organization.Yet thereare many such reportsin the accountingliterature.
Many of the documentedexamples of falsificationand dysfunctional
decisionmakingwere an outgrowthof attemptsto make the accounting
reports a more favorable reflectionof the manager's or the worker's
performance.Whyte has describedthe ingeniousattemptsof a group of
workersto obtain easier standardswhentheirpaymentsincludeda bonus
based on thesestandards.1Otherinvestigatorshave notedthe tendencyof
managersto pad theirbudgetseitherto make the reportedvariances more
favorable or in anticipationof cuts by eithersuperiorsor accountants.2
Perhaps of even more concernto accountantsare the numerousexamples
in the literatureof managersmakingdecisionsin responseto the account-
ing system,even thoughthe decisions are contraryto the goals of the
cm
* Lecturer,ManchesterBusinessSchool. Digitally signed by cm

1W. F. Whyte,Moneyand Motivation(New York: Harperand Row,1955).

DN: cn=cm, c=US
Reason: I have
reviewed this document
Date: 2019.10.21
11:02:12 +07'00'

'See, for instance,L. S. Rosen and R. E. Schneck,"Some BehaviouralConse-

quences of AccountingMeasurementSystems,"Cost and Management,October
(1967), pp. 6-16; A. E. Lowe and R. W. Shaw,"An Analysisof ManagerialBiasing: c

Some Evidence from a Company'sBudgetingProcess,"Journalof Management

m

Digitally signed by cm
DN: cn=cm, c=US
Date: 2019.10.21 11:01:35 +07'00'

Studies,V (1968), 304-15; M. Schiffand A. Y. Lewin,"The Impact of People on

Budgets," The Accounting Review, XLV (1970), 259-68.
156

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 ACCOUNTING AND PERFORMANCE EVALUATION 157

organization.3 Dearden has reportedmany such anecdotes in a series of

publications.4For instance,he tells of a manager who was reluctantto
replace equipment,even when it was in the company'seconomicinterest,
because of the heavy book losses whichwould be unfavorablyreflectedin
his currentperformance reports.
There are many similar examples in the accounting literature,but
unfortunately most of them are in the formsof anecdotes and, of more
importance,little considerationhas been given to the conditionsunder
which such behavior is likely to occur. Yet this type of knowledgeis
importantfor accountants who are concernedwith system design and
change. In particular,it is importantto know whetherthe dysfunctional
behavior is a necessary consequence of using the accountingdata in
performanceevaluation or at least of the imperfectionsin accounting
systemsor, rather,whetherit is dependentupon the precise mannerin
whichthe accountingdata are used. The issue is a significantone because
thevariousalternativeexplanationssuggestdifferent remedies.

Some ProblemswithAccountingMeasures ofPerformance

Althoughaccountingdata can reflectat least some of the important
dimensionsof managerial performance,accountants are faced with a
series of major problemsin designinginformationsystemsforthis pur-
pose. First,not all the relevantdimensionsof managerialperformanceare
included in accountingreportssince neitheraccountants nor managers
have developed comprehensivemeasures and standards.5Second, even
consideringthe economicaspects of performance,an organization'seco-
nomic cost functionis rarely known with precision and an accounting
systemcan only attemptto approximatelyrepresentits complexity.This
is a particularproblemwith highlyinterdependent patternsof activities.
Third, the accounting data are primarilyconcernedwith representing
"For instance, F. J. Jasinski, "Use and Misuse of EfficiencyControls," Harvard
Business Review (July-August, 1956), pp. 105-12; V. F. Ridgway, "Dysfunctional
Consequences of Performance Measurements," Administrative Science Quarterly, I
(1956), 240-47; A. Etzioni and E. W. Lehman, "Some Dangers in 'Valid' Social
Measurement," Annals of the American Academy of Political and Social Science,
CCCLXXIII (1967), 1-15.
'J. Dearden, "Problem in Decentralized Profit Responsibility," Harvard Business
Review (May-June, 1960), pp. 72-80; B. D. Henderson and J. Dearden, "New System
forDivisional Control," Harvard Business Review (Sept.-Oct., 1966), pp. 144-60.
The development and utilization of human resources is one example, although
some preliminaryresearch is now being conducted into ways of measuring the value
of human resources. For one line of thought on this issue, see R. L. Brummet, E. G.
Flamholtz and W. C. Pyle, "Human Resource Measurement-A Challenge for Ac-
countants," The Accounting Review, XLIII (1968), 217-24, and W. C. Pyle, "Moni-
toring Human Resources 'On Line,"' Michigan Business Review, XXII (1970), 19-32.
The general topic of more inclusive measures of performance is discussed in the
"Report of the Committee on Non-Financial Measures of Effectiveness," The Ac-
countingReview, supplement to XLVI (1971), 165-212.

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158 EMPIRICAL RESEARCH IN ACCOUNTING: SELECTED STUDIES, 1972

outcomes,whilemanagerialactivityis concernedwiththe detailedprocess

givingrise to the finaloutcomes.If thereare factorswhich constrainthe
reportedefficiency of the process despite the quality of the manager's
performance, the accountingdata will be an inadequate reflectionof his
performance.For a fair evaluation, the controllablecomponentof the
if not impossible,task.6
reportsshould be isolated,yet this is a difficult,
Fourth,the main emphasis of accountingreportsis on short-termper-
formanceindexeswhilethe evaluationof managerialperformanceis often
concernedwithmorelong-termconsiderations.7 Ultimately,of course,the
very cost of providingthe informationis an importantconstrainton the
accuracyand relevanceofthe data.
In addition,accountingsystemsare also tryingto servemany purposes.
Each purposemay ideally necessitatethe preparationof a unique set of
data, although accountants frequentlytry to produce general purpose
reportswhichare of some value forat least some of these manypurposes.
However,in tryingto satisfya seriesof purposes,the reportsmay fail to
perfectlysatisfythe requirementsfor any single purpose-the appraisal
ofmanagerialperformance, forinstance.
While it is frequentlypossible to improvean existingaccountingper-
formancemeasurementsystem,it is often,if not always, impossibleto
achieve the ideal system.The informationprovided by an accounting
systemmust thereforeusually be used with discretionwhen evaluations
are made on the basis of it. Many accountantsrealize this and some act
accordingly,but the accountingdata are also used by othermanagerswho
may not use themin an appropriatemanner.It was forthis reason that
the presentresearchwas undertaken,in the beliefthat an understanding
of the way in whichmanagersadapt to accountingsystemsdependsupon
a more detailed knowledgeof how accountingdata are used. Particular
IIn a basic sense the problemmay be insoluble.The determination of whethera
factorsin
or uncontrollable
budgetvariance,forinstance,is due to a manager'sefforts
eitherthe internalor externalenvironments of the organizationwould require a
model of the organizationand its relationshipto the environment.In this way we
would certainlybe able to measurethe influenceof a managerbut is such a model
possiblein a worldof uncertainty,and even if it existed,mightnot the role of the
managerbe radicallychanged?See K. J. Arrow,"Researchin ManagementControls:
A Critical Synthesis," in Management Controls: New Directions in Basic Research,
ed. C. P. Bonini,R. K. Jaedicke,and H. M. Wagner(New York: McGraw-Hill,1964).
Short-termaccountingreportsmay look favorablebecause decisionshave been
made to postponeor cancel expenditures as part of a strictcost controlprogram,
althoughthe finalcosts,whichmay not even be reflected in the cost centerreports,
may be higherthan the cost, at the time, of postponement.This problem is
illustratedby Likert'sdiscussionof the moreproblematiclong-term impactof cost
controlprogramsdespite theirapparentshort-term success.Althoughthere is the
usual tendencyto overgeneralize, evidencethat the problemis an
thereis sufficient
importantone. See R. Likert,New Patternsof Management(New York: McGraw-
Hill, 1961) and The Human Organization: Its Management and Value (New York:
McGraw-Hill,1967).

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 ACCOUNTING AND PERFORMANCE EVALUATION 159

attentionis givenin the studyto the use of accountingdata in managerial

performanceevaluation,a topic whichhas been of some concernto both
practicingand academic accountants.8

The Use ofAccountingData in PerformanceEvaluation

It is importantto recognizethat even standard accountingreportscan
be used in many different ways in performanceevaluation. Within the
human consciousness, while the accountingdata are given,theirinterpre-
tationand precise use is the outcome of a personaland social processwhich
is sustained by the meanings,systemsof belief,pressuresand purposes
that are broughtto bear by the managersusing the data. In of necessity
providingthe data with a personalsignificanceand placing themin their
own wider intellectualcontext,managersare able to use them,perhaps
withoutreflection, in a varietyofways.
Such a processis recognizedby many in the social sciences,although,
surprisingly, the problemof differential use has not been systematically
consideredin the accountingliterature.So far attentionhas been primar-
ily focusedon the technicaldesign of performancemeasurementsystems
and the possibilitiesfor reducingthe unanticipated behavioral conse-
quences by changingthe indexesused. There is no doubt that this is a
necessaryconcern.It reflects,however,only a partial viewpointand it is
just as necessaryto develop a perspectivewhichenables us to distinguish
betweenthe pluralityof ways in which accountingdata can be used to
evaluate performance. To thiswe nowturn.
The relativevisibilityof eventswithinan organizationis partlydeter-
mined by accountingmeasures of managerial performancesince they
influencebothindividualperceptionsand the processby whichthe expec-
tations held by managersat all levels are formulatedand revised.While
they are designed to mobilize individual energies and motivationsto
increasethe efficiency of an organization'soperations,it is possiblethat at
timestheirpresencecan lead to a transferenceof interestfromthe wider
organizationalpurposes which they were designed to serve on to the
specificbehaviorwhich is necessaryto improvethe indexes of perform-
ance. Merton has discussed this process in termsof a "displacementof
goals" whereby"an instrumentalvalue," in this case an index which is
intendedto identifyareas for investigationand enquiry, "becomes a
terminalvalue" soughtforon its own accord.9

8One indication of recent interest in this topic is the symposium held at Ohio
State University in 1968. See T. J. Burns, ed., The Behavioral Aspects of Accounting
Data for Performance Evaluation (Columbus, Ohio: College of Administrative
Sciences, Ohio State University,1970).
'R. K. Merton, "The Unanticipated Consequences of Purposive Social Action,"
American Sociological Review, I (1936), 894-904, and Social Theory and Social Struc-
ture (New York: The Free Press, 1957), pp. 199-200.

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160 ANTHONY G. HOPWOOD

The accountingmeasuresof managerialperformanceare givena mean-

ing and interpretation. In this paper these broad distinctionsare used as
the basis for distinguishingbetweenways in which accountingreports
which show the actual and budgeted costs for a cost center,and the
difference betweenthem,can be used in evaluatingthe performance of the
personresponsiblefor the cost center.Three styles of evaluation which
make distinctlydifferent uses ofthe data are isolatedand defined:
1. Budget ConstrainedStyle. Despite the many problemsin using ac-
countingdata as comprehensive measuresof managerialperformance, the
evaluation is primarilybased upon the cost centerhead's abilityto con-
tinuallymeetthe budgeton a short-term basis. This criterionof perform-
ance is stressedat the expenseof othervalued and importantcriteriaand
a cost centerhead will tend to receive an unfavorableevaluation if his
actual costs exceed the budgetedcosts,regardlessof otherconsiderations.
2. ProfitConscious Style. The performanceof the cost centerhead is
evaluated on the basis of his ability to increasethe generaleffectiveness
of his unit's operations in relation to the long-termpurposes of the
organization.One importantaspect of this at the cost centerlevel is his
concernwith the minimizationof long-runcosts.'0 For this purpose the
accountingdata mustbe used withsome care in a ratherflexiblemanner.
3. NonaccountingStyle.Accountingdata play a relativelyunimportant
part in the supervisor'sevaluation of the cost centerhead's performance.
While the accountingdata clearly indicate whethera personhas been
successfulin meetingthe budget,they do not necessarilyindicatewhether
he is behavingso as to minimizelong-runcosts,let alone influenceother
determinants In orderto assess this ability,the data may
of effectiveness.
have to be used with discretionand, wherenecessary,supplementedwith
informationfromothersources.Unlike a Budget Constrainedevaluation,
a ProfitConsciousevaluation is thereforeconcernedwiththe widerinfor-
mationcontent,or lack of it, of the accountingdata, and not withjust a
rigid analysis of the directionand magnitude of the reportedbudget
variances.

Responses to the Use of AccountingData in Performance

Evaluation
A study of the manipulationsand otherdysfunctionalbehaviorsmade
in responseto an accountingbased evaluation poses a numberof impor-
10The idea of cost minimization is overly simple because, in itself, it does not
necessarily result in either profit maximization or the attainment of more wide-
ranging definitionsof organizational effectiveness.However, since production volume
was not determined by the persons in charge of the cost centers in the subject
company, the objective of minimizing the long-run costs for the specified volume of
production is more likely to be congruous with profitmaximization. More generally,
the idea is used to reflectthe directionof concernratherthan a constraint.

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 ACCOUNTING AND PERFORMANCE EVALUATION 161

tant methodologicalproblems.We would expect to find differences be-

tweencost centersin boththe opportunitiesforsuch behaviorand its ease
of detection.This means that it is difficult to study behavioral responses
of this type by the use of survey or data analysis techniquesacross a
large numberof cost centers.Instead, they must be investigatedthrough
the intensivestudyof a smallernumberof cost centers.However,in order
to providesome basis forthe selectionof cost centersforsuch an investi-
gation,as well as addingsome validityto the findings, concernis givenin
the studyto the specificationof a series of concurrentconditionsassoci-
ated withsuch behavior.In this way a morethoroughunderstandingwill
be gained of the behavioralresponsesto the various stylesof evaluation.
If the accountingreportsare used in a mannerconsistentwith a Profit
Conscious style of evaluation, problems associated with using the ac-
countingdata in performanceevaluation are less important.It may be
difficultto isolate the relevantaspects of the data, but the personmaking
the evaluation will at least be aware of the problems.Perhaps of more
importancehe will knowthat his own objectiveof long-termcost minimi-
zation is not necessarilyconsistentwith a set of favorable short-term
budgetvariances.Additionalinformation sourcesmustbe used to supple-
mentthe accountingdata.
However,in the case of a Budget Constrainedevaluation,the implica-
tionsforthe costcenterhead are different. Due to the incompletenatureof
the accountingdata therewill be disagreementand conflictbetweenhim
and his supervisoroverthe dimensions,and theirvalues, on whichthe job
is describedand evaluated. This is capable of resultingin some anxiety
since performanceevaluations are often an importantaspect of the
developmentand maintenanceof a person'sself-esteem."The cost center
head will not gain recognitionfor his accomplishmentson dimensions
whichhe views as importantand relevantbut which are not reflectedin
the accountingdata, althoughhe mightwell be evaluated on dimensions
whichhe genuinelyconsidersto be irrelevant.
Furthermore, even if the cost centerhead triesto improvehis perform-
ance in termsof the accountingindexes,the behaviorwhich is necessary
to achieve this is not always clear if some of the reportedcosts are not
underhis controlor if the standardsare subject to error.His own efforts
to improvethe performanceindexesmay be overshadowedby the behav-
ior of otherpersonswho are able to influencehis reports.He cannot be
sure that a given action will result in a favorableevaluation-a further
conditionwhichcan contribute to experienceoftensionand anxiety.'2
Hypothesesof
"S. F. Miyamotoand S. M. Dornbusch,"A Test of Interactionist
Self-Conception,"American Journal of Sociology, LXI (1956), 399-403.
" See, forinstance,A. R. Cohen, "SituationalStructure,
Self-Esteemand Threat
OrientedReactionsto Power,"in Studies in Social Power,ed. D. Cartwright (Ann
Arbor,Mich.: InstituteforSocial Research,Universityof Michigan,1959),and R. L.
Kahn, et al., Organizational Stress: Studies in Role Conflict and Ambiguity (New

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162 ANTHONY G. HOPWOOD

The disagreement, biases and uncertaintyintroducedinto the perform-

ance evaluationby a Budget Constrainedstyleof evaluation are not only
likelyto be seen as unjust by the cost centerhead, but theywill also be a
sourceof conflict, tensionand anxiety.As a consequence,he is less likely
to be satisfiedwiththe supervisorwhose style of evaluation poses such a
threatto his security.13
The cost center head can, however,attempt to relieve the tension
associated with a Budget Constrainedstyle of evaluation by engagingin
various formsof coping behavior.First, he can try to blame other cost
centerheads forhis own unfavorablevariances.He can concentrateon the
activitiesof his own unit,tryingto improvethe reportedbudgetvariances
regardlessof how this affectsthe performanceof other units. Argyris
foundthattherewas the greatestrivalryand competition, and less friend-
ship between in
colleagues departments with the highestpressurefrom
managementcontrols.14 In his earlier study of the budgetarysystemof
four companies,he presentsvivid evidence of interdepartmental strife,
departmentcenteredness,and blaming other persons when things go
wrong.15Behavior of this type is hypothesizedto be a result of the
competitiverelationshipsbetweenthe cost centerheads in a Budget Con-
straineddepartment,and the consequentdeteriorationin theirfriendship
ties,helpfulnessand mutualrespect.16The resultis one whichis not only
uncomfortablefor the cost centerheads but also dysfunctionalto the
companysince a certainamountof cooperationis essential forachieving

York: John Wiley, 1964), pp. 85-86. There is also evidence of a positive relationship
between uncontrollability and feelings of tension and anxiety in the specific case
where one organization subunit is interdependent with one or more other subunits,
whether the interdependence is facilitative or hindering. See M. Deutsch, "An
Experimental Study of the Effects of Cooperation and Competition upon Group
Process," Human Relations, II (1949) 199-231, and E. J. Thomas, "Effects of Facilita-
tive Role Interdependence on GrouipFunctioning," Human Relations, X (1957), 347-
66.
18 E. Kay, H. H. Meyer, and J. R. P. French, Jr., "Effects of Threat in a
Performance Appraisal Interview," Journal of Applied Psychology, XLIX (1956),
311-17. Kahn and his associates have also found that persons who receive conflicting
and ambiguous role expectations are less likely to maintain favorable relationships
with the persons sending the expectations. See Kahn et al., op. cit., p. 90.
14 C. Argyris,UnderstandingOrganizational Behavior (Homewood, Ill.: The Dorsey

Press, 1960).
15
C. Argyris,The Impact of Budgets on People, a study prepared for the Control-
lership Foundation (Cornell University, School of Business and Public Administra-
tion, 1952). H. White has also described a case of interdepartmentalconflictdue to
the specificproblems caused by the allocation of costs. See his "Management Conflict
and Sociometric Choice," American Journal of Sociology, LXVIII (1961), 185-99.
16On the relationship between competition and the quality of interpersonal rela-
tionships, see Deutsch, op. cit., Thomas, op. cit., and E. Trist and K. Bamforth,
"Some Social and Psychological Consequences of the Longwall Method of Goal
Getting,"Human Relations, IV (1951), 3-38.

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 ACCOUNTING AND PERFORMANCE EVALUATION 163

performanceand allowinga flexibleresponseto unusual circum-

efficient
stances.17
The cost centerhead can also attemptto achieve a favorable set of
budgetvariancesby manipulatingthe accountingdata. He can falsifythe
accountingrecordsand make decisionspurelyon the basis of theireffect
on the short-term budgetreportseven whenthe resultsare contraryto the
long-terminterestsof the company.Blau foundthat a groupof adminis-
tratorsbehaved so as to improvetheirperformanceon the basis of the
statisticalindexeswhichwereused in theirevaluation,even if this behav-
iorresultedin dysfunctionalconsequencesforthe organization.'8
The above argumentscan be expressed in the followinghypotheses
whichare testedin the study:
If a cost centerhead perceivesthat he is evaluated on the basis of a
Budget Constrainedstyle he is (a) more likely to experiencejob
relatedtension; (b) morelikelyto reporthavingpoor relationswith
his supervisor; (c) more likely to reporthaving poor relationswith
his peers; (d) morelikelyto engagein falsificationof the accounting
data and dysfunctionaldecisionmaking,than if he perceivesthat he
is evaluated on the basis of either a Profit Conscious or a Non-
accountingstyle.

ResearchSite and Methodology

The study was conductedin one manufacturingdivision of a large
Chicago-based company.'9The division has a labor force in excess of
20,000 persons and has an annual revenue of several hundred million
17
See, for instance, B. S. Georgopoulos and A. S. Tannenbaum, "A Study of
Organizational Effectiveness,"American Sociological Review, XX (1957), 534-40. It
should be borne in mind, however, that the relationship between both personal and
organizational conflict and organizational effectivenessis not straightforward,the
outcome depending on the type of conflict,its context, the manner in which it
handled one's personal values. See M. Deutsch, "Conflicts: Productive and Destruc-
tive," Journalof Social Issues, XXV (1969), 7-41.
18p. M. Blau, The Dynamics of Bureaucracy (University of Chicago Press, 1955),
pp. 36-56. The study has been replicated by H. Cohen in his The Demonics of
Bureaucracy: Problems of Change in a Government Agency (Ames, Iowa: Iowa
State UniversityPress, 1965).
19 The division is divided into a series of areas, departments,and cost centers. Each

area includes several departments, and each department is divided into a series of
cost centers. There are nine major hierarchical levels in the division: (1) Vice
President; (2) General Manager; (3) Assistant General Manager; (4) Area Man-
ager; (5) Departmental Supervisor; (6) Assistant Departmental Supervisor; (7)
General Foreman; (8) Foreman; (9) a blue-collar bargaining unit level. Cost centers
are usually under the responsibilityof a general foreman,although some foremen and
assistant departmental supervisorsare also in charge of cost centers. One person may
be in charge of several cost centers; at the time this study was conducted, there were
over 350 cost centersunder the responsibilityof 193 cost centerheads.

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164 ANTHONY G. HOPWOOD

dollars. It is a companywhose seniormanagementis justifiablyproud of

its recordof goodpersonnelrelationsand highemployeesatisfaction.
The division's accountingsystem,which is a fairlysophisticatedone
based on flexiblebudgetsand standardcostingtechniques,was installeda
decade ago, and it is now an accepted and importantpart of the work
environment.Monthlyreportscomparingthe actual and budgetedcosts
forcost centersare issued to all cost centerheads and theirdepartmental
supervisors,20 and these are supplementedby daily and weeklyreportson
such mattersas production,labor and supplies,the natureand contentof
whichvary betweencost centers.All internaltransfersof materials and
servicesare made at a predetermined standardpricewhichis based on the
full cost of providingthe material or service,and all the reportscontain
overheadcostsallocated fromotherunitsin one division.
The studyconsistedof two phases, a questionnairephase, the resultsof
which receive primaryattentionin the presentpaper, and an interview
phase. This research design was selected so as to enable a study of
manipulativebehaviorin a seriesof carefullyselectedcost centers,while
allowingthe otherhypothesesto be testedby the use of surveytechniques
witha largersampleof subjects.
The analysis is based on questionnairessentto all of the 193 personsin
the-divisionwho werein chargeof cost centers.Wherea respondentfailed
to returnthe initial questionnaire,up to two follow-uplettersweresentto
him.The finalresponserate was veryhigh,namely87 percent(167 out of
the 193). Once the questionnaireshad been returnedand the basic analy-
sis completed,20 cost centerheads in four departments(two predomi-
nantlyBudget Constrained,one ProfitConsciousand one Nonaccounting)
were selected as the focal personsfor the interviewphase of the study.
The statisticalanalysis of the questionnaireresponsesis based on nonpar-
ametricstatistics,namelyKendall's Tau and the Mann-WhitneyU test.21

Measurementof the Variables

THE SUPERVISOR ' STYLE OF EVALUATION

Informationon the supervisor'sstyle of evaluation was obtained from

each cost center head. Eight possible criteriaof performancewere in-
20
Three monthlyreportsare prepared for the large production cost centers,namely
a Performance Summary, an Operating Statement and a Processing Cost Statement
The Performance Summary provides an analysis of the monthly variance and a
summary of production data. The Operating Statement accounts for the materials
charged to the cost center and the rejected output in both physical quantities and
dollars. A statement of the related budget variances is included on the report.
Finally, the Processing Cost Statement presents detailed budget and actual cost
information on all elements of cost other than the cost of the principal materials.
Only the Processing Cost Statement is prepared for the smaller production cost
centersand the service cost centers.
a S. Siegel, Nonparametric Statistics (New York: McGraw-Hill, 1956).

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 ACCOUNTING AND PERFORMANCE EVALUATION 165

eludedin the questionnaire.A Budget Constrainedstyleof evaluationwas

representedby the criterion"meetingthe budget"and a ProfitConscious
styleby "concernwithcosts."These phraseswereselectedto representthe
two styleson the basis of observationsmade duringa seriesof exploratory
interviewson the researchsite. At the time,it was foundthat they were
used by cost centerheads to referto distinctpatternsof behaviorwhich
werein agreementwiththedistinctionsdescribedabove.22
Two measures of the supervisor'sstyle of evaluation were obtained
fromthe questionnaireresponses.The principalmeasureis based on the
relativeimportanceof the various criteria.Cost centerheads were asked
to rank orderthe threemostimportantcriteriain theirevaluation.On the
basis of the rankings,the followingevaluative styles are defined.The
numberof respondents in each groupis shownin parentheses:
(i) Budget Constrainedstyle (BC): meetingthe budget,but not con-
cernwithcosts,rankedamongthetop threecriteria(33).
(ii) Budget-Profitstyle (BP): both meetingthe budget and concern
withcostsamongthetop threecriteria(17).
(iii) ProfitConscious style (PC): concernwithcosts,but not meeting
thebudget,rankedamongthetop threecriteria(43).
(iv) Nonaccountingstyle (NA): neithermeetingthe budgetnor con-
cernwithcostsrankedamongthetop threecriteria(74) .23
In additionto these measures based on the relative importanceof the
various criteria,anotherseriesof measureswas based upon the cost center
head's ratingsof the absolute importanceof each separate criterion.The
ratingswere givenon a five-pointscale varyingfrom"of no importance"
to "very important,"and there is evidence of consistencybetween the
rankingsand theratings.
THE DEPENDENT VARIABLES24

A 15-itemindexof job relatedtension,whichhas been used extensively

in previousresearch,was used in the study.25In addition,a 3-itemindex
2The other performance criteria were cooperation with colleagues, getting along
with the boss, effortput into the job, and concern with quality. Also, attitude
towards the work and company, and ability to handle the men.
2 The operational definitionof the Nonaccounting style should be interpreted as
implyinga low relative importance to the accounting related criteria.
24A complete discussion of the operational definition and characteristics of the
dependent variables is included in A. G. Hopwood, "An Accounting System and
Managerial Behavior" (unpublished Ph.D. dissertation,University of Chicago, 1971).
2 See Kahn et al., op. cit., pp. 424-27. In the present study, it is important to
investigate the behavioral and attitudinal correlates of tension because in organiza-
tional studies, as in personality studies, it cannot be assumed that tension is
necessarily dysfunctional to the individual or the organization. Indeed, there is
evidence which suggests that certain amounts of tension can be functional to both
the individual and the organization, and that the relationship between functional
consequences and tension is more like a curvilinear one. See E. P. Torrance, "A
Theory of Leadership and Interpersonal Behavior Under Stress," in Leadership and

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166 ANTHONY G. HOPWOOD

of specificcost tensionwas developedconcernedwiththe extentto which

the cost centerhead worriesabout costs, meetingthe budget,and feels
that this interfereswith the rest of his work. The index of specificcost
tensionis independentof the job related tensionindex (Tau = 0.07). So
as to obtain a comprehensivepictureof the state of interpersonalrela-
tions,eightindexesof the cost centerhead's relationswith his supervisor
and six of his relationswithhis peerswereincludedin the questionnaire.26

Results
The firstpart of the analysis is based upon the evaluative stylesdefined
in termsof the relativeimportanceof the various performance criteria.An
examinationof Table 1 reveals that cost centerheads who feel that they
are being evaluated on the basis of a Budget Constrainedstyle reporta
significantly higherlevel of job related tensionthan those who are eval-
uated on the basis of eithera ProfitConscious or a Nonaccountingstyle.
There is also a tendencyforthisto be trueeven whenan attemptis made
to combinethe Budget Constrainedand ProfitConsciousstyles.However,
all of the accountingrelated stylesof evaluation resultin a similarlevel
of specificcost tension.A ProfitConscious style does lead to worrying
about costs and the budget,but unlikethe Budget Constrainedstyle,this
does not spreadto moregeneralfeaturesofthejob.
When cost centerheads are evaluated on the basis of their ability to
continuallyavoid unfavorablebudgetvariances,success in satisfyingthis
criterionresults in lower job related tension.For the combinedBudget
Constrainedand Budget Profitevaluation groups,there is a small but
significantnegativerelationshipbetweenthe cost centerhead's success in
Interpersonal Behavior, ed. L. Petrullo and B. M. Bass (New York: Holt, Rinehart
and Winston, 1961), pp. 100-117, and D. Sirota, "Some Effects of Promotional
Frustration on Employees' Understanding of, and Attitudes Toward, Management,"
Sociometry, XXII (1959), 273-78. It is therefore of interest to note that previous
studies have found that the index of job related tension used in the present study is
correlated with role conflict and ambiguity, and the presence of mild neurotic
symptoms. This provides evidence that the index is sensitive to at least some of the
dysfunctional aspects of tension. See B. J. Indik, S. E. Seashore and J. Slesinger,
"Demographic Correlates of Psychological Strain," Journal of Abnormal and Social
Psychology, LXIX (1964), 26-38; Kahn et al., op. cit., and J. D. Snoek, "Role Strain
in DiversifiedRole Sets," American Journalof Sociology, LXXI (1966), 363-70.
2 The indexes of relations with the supervisor are trust in the supervisor; respect
for the supervisor; the perception of the supervisor's understandingof job problems;
the perceived reasonableness of the supervisor's expectations; satisfaction with the
supervisor's technical knowledge; satisfaction with the supervisor's administrative
ability; satisfaction with the supervisor's human relations skills; general satisfaction
with the supervisor. The peer relations indexes are peer supportiveness-achievement;
peer supportiveness-affiliation;peer agreement; peer helpfulness; respect for peers;
peer friendship.The indexes were developed at the Institute for Social Research at
the University of Michigan, and have been extensively used in various studies by
membersof the Institute.

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 ACCOUNTING AND PERFORMANCE EVALUATION 167

meetingthe budget in the six-monthperiod before the receipt of the

questionnaire,27and the job relatedtensionwhichtheyexperience(Tau =
-0.17; p < .05). There is no similarreductionin cost tension (Tau =-
0.04). Past success is not, however,instrumentalin reducingjob related
tensionin eitherthe ProfitConscious or Nonaccountinggroups (Tau is
0.04 and 0.03 respectively),an importantfindingwhich increases our
confidencein the constructvalidity of the operationaldefinitionsof the
evaluativestyles.28
A personwho is subject to a Budget Constrainedevaluation may have
little controlover the month-to-month variances, and as a result he is
forcedto devotea large part of his time and effortto franticattemptsto-
findsomeway out of the dilemma.One such cost centerhead describedhis
in the followingway:
difficulties
You have to get yourselfout of the woods. It's a process of staying out of the red.
You have to. It's true,it's true,and it makes a job so much more difficult,There'd
be times when I could do a good job and save some money by spending a bit
now. But no, the only thing I concentrate on is what I've got forthcomingthat's
going to put me in the red. I've got to concentrate to see ... there's no more
money to spend. God, it causes me some problems.

Sometimesit is almost impossibleto make the short-termbudget vari-

ances more favorable,as is the case for the cost center heads whose
variances are highlydependenton productionvolume. "When I'm in the
red I start cuttingon manpower.Well, I should,but I can't. We've been
down on manpowerforsometimenow. I just have to live on my budget,
close to the bone, but you can't, you can't." These franticand often
unsuccessfulattemptsonly result in more problems,more tension and
moreworry.
Cost centerheads who are subject to a ProfitConscious evaluation are

`7The index of past success in meeting the budget is based on the mean of the
percentage ratios of budgeted to actual costs forthe six months prior to the receipt of
the questionnaire. This ratio is the principal formin which the monthly variances are
reportedin the subject company.
2 L. J. Cronbach and P. E. Meehl, "Construct Validity in Psychological Tests,"
Psychological Bulletin, LII (1955), 281-302. The finding is important because it
provides some independent evidence of the validity of the evaluative classifications.
Furthermore,it is not subject to at least the danger of self-consistentresponses when
the cost center heads supply both the information on the evaluative styles and on
some of the dependent variables. In this respect,it is important to note that although
the level of general job satisfaction was significantlylower in the BC group than in
the PC and NA groups, the overall level of satisfaction in all groups was rather high.
With a possible range of 7 to 35, the range of responses on the index of job
satisfaction was 18 to 35, with a mean of 30.2 and a standard deviation of 3.9. The
level of job satisfaction in the BP group was not significantlydifferentfrom that in
the PC and NA groups. In addition, it is also important to note the subsequent
evidence, some of which is based on an analysis of the accounting data, of different
decision behaviors associated with the evaluative styles.

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168 ANTHONY G. HOPWOOD

not, however,having an easy time, as is shown by the followingquota-

tion:29
[The ProfitConscious supervisor] is always asking about costs-all the time. This
is basically the heart of it, I guess, costs. Anytimewe get togetheror whenever he
gets you its costs, costs, costs. "See if we can cut down." "It's going pretty fast,
we'd better talk about it." He's a little bit too strict really. I'm used to disci-
pline, but he runs a tightship. He does not like us to get sloppy; he gets hot under
the collar. He tries to save whatever he can. He just likes to operate that way. He
is just that type of person,but to be fair,he applies pressure where it is appropri-
ate.

A ProfitConsciousstyleis seen as a demandingstyleof evaluation but it

is also seen as a fairone. Uncontrollablevariances are eithernot queried
or,even iftheyare queried,theycan usually be explained.The cost center
heads are able to justifyactions which result in long-termcost savings
even thoughtheyproduceunfavorablecurrentbudgetvariances.Indeed it
is the ability to explain which plays an importantrole in avoiding the
highertensionand anxietyassociated withthe Budget Constrainedstyle,
a stylewhose approach is "just don't do it, ratherthan asking forexpla-
nations."
The different uses of the accountingdata in performanceevaluation
affectthe cost centerheads' perceptionsof how justly theirperformanceis
evaluated.30In Table 2 it can be seen that whenthereis a tendencyto use
the accountingdata in terms of a Budget Constrainedstyle, the cost
centerheads feel that their evaluation is less just than those reporting
eithera ProfitConsciousor Nonaccountingstyle.
The evidenceon the effectsof the stylesof evaluation on relationships
withthe supervisoris in agreementwithhypothesis(b). As can be seen in
Table 3, thereis a tendencyforthe cost centerheads' perceptionsof their
relationswiththe supervisorto deteriorateif he is seen as using a Budget
Constrainedstyle or even if he attemptsto combine the Budget Con-
strainedand ProfitConscious styles.In contrast,if the supervisoruses a
ProfitConsciousstyle,thereis a tendency,not sufficient howeverto reach
for
statisticalsignificance, the cost centerheads to reportmore favorable
relationswith him than with even a Nonaccountingsupervisor.
A Budget Constrainedstyle of evaluation also resultsin reportsof less
favorablerelationswith peers. The evidence presentedin Table 4 is an

29There is additional evidence in the questionnaire responses which supports this

statement. Cost center heads were asked to rank not only the top three criteria used
in their evaluation, but also the three which they would prefer to be used. A
comparison of these responses shows that 17 of the 43 (39.5%) respondents who
reported that their supervisorused a ProfitConscious style thought that concern with
costs should have a lower rank in theirevaluation.
" Based on responses to the question "How justly do you think your performance
is evaluated?" The responses were given on a 5-point scale ranging from "my
performance is always evaluated justly" to "my performance is never evaluated
justly," and the index has a possible range of 1 to 5.

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 ACCOUNTING AND PERFORMANCE EVALUATION 169

agreementwith hypothesis(c), with the worst reportsof peer relation-

ships occurringwhenthe supervisoris perceivedas using eithera Budget
Constrained or a Budget Profit style.31When someone is continually
asked about budgetvariancesover whichhe has littleor no control,there
is a tendencyto try to pass on the responsibilityby blaming other
persons.This is known as "fingerpointing"or "passing the buck." The
practice is described by a cost center head in a Budget Constrained
department:
There's passingthe buck when we're told to cut down,because we have no
control.Whatgoodis it tellingus to cutback. We don'thave control.Occasionally
itemthatI couldhold back but,in themain,mostconditions
there'sa noncritical
ofbeingin the red are thingswe have no controlover.Yet we'restillblamedfor
them.It's a tensionrelieverto pass it on to someoneelse.
Not only is therea definitetendencyto blame otherpersons,but also,
because each cost centerhead in this situationis anxiouslydevotedto the
avoidance of unfavorablered variances, he concentratessolely on the
activitiesof his own cost center,failingto be concernedwith how this
affectsthe neighboringoperations.This can have an importanteffecton
of the department'soperations,since it resultsin a sluggish
the efficiency
decision process and a constrainton innovation.82The argumentsand
I"The questionnaire responses cover only certain rather general aspects of the
effectsof the differentevaluative styles on the network of interpersonalrelations. In
all cases the questions on peer relations, for instance, referredto "the people (or the
man) at your level in the company with whom you have to deal in your job." The
general reference,while locating important differencesbetween the styles of evalua-
tion, also obscured some of the detailed patterns of response. Some limited forms of
task cooperation between cost center heads reporting a Budget Constrained evalua-
tion were noted during the interview phase of the study. There was, however, a very
definitepreferencefor this cooperation to be with persons in charge of cost centers in
departments other than one's own, particularly the central service units, or with
persons in the same department who were in charge of noninterdependentunits. The
relationships were usually instrumental in nature, being formed for the purpose of
mutually improving budget variances, the relationships formingpart of a system of
reciprocal obligations (see A. W. Gouldner, "The Norm of Reciprocity: A Prelimi-
nary Statement," American Sociological Review, XXV (1968), 161-78). The findings
are similar to those reported by Roy in his "Efficiency and 'the Fix': Informal
Intergroup Relations in a Piece Work Machine Shop," American Journal of Sociol-
ogy, LX (1955), 255-66.
I- The relationship between budgetary systems and innovation has been referredto
in the research conducted as part of the Carnegie Project on the Behavioral Theory
of the Firm. See R. M. Cyert and J. G. March, A Behavioral Theory of the Firm
(Englewood Cliffs,NJ.: Prentice-Hall, 1963) and J. P. Crecine, Governmental Prob-
lem Solving: A Computer Simulation of Municipal Budgeting (Chicago: Rand
McNally, 1969). The problem was also raised during the discussions reported in
Burns, op. cit., pp. 254-55. In those conferenceproceedings,Bedford notes, perhaps a
little too strongly,the "... complete neglect of the influence of risk on innovation
acceptance .... Clearly, any study of the behavioral response to accounting data
should include consideration of differenttypes of risks involved in making changes."
Burns, op. cit.,p. 323.

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170 ANTHONY G. HOPWOOD

conflictsin the Budget Constraineddepartmentsincreasethe difficulty of

controllingimportantbut highlyinterdependent aspects of the production
process such as delay time. No one wants to take responsibilityfor a
decision,just in case it coststoo muchor resultsin an unfavorablebudget
variance, as is illustratedby the followingcommentsmade by a cost
centerhead in a BudgetConstraineddepartment:
We sometimes have problems coming to an agreement.Well, it's the way we talk
around here. Discussions can get prettyheated at times. Well, there was one item
not too long ago. Whenever a buddy came up with an idea, no one's idea was the
same and, as a consequence, we still haven't got it. "No, that wouldn't be worth a
damn," that's what the others say. One guy wanted it this way, one guy that way,
and as a consequence we still haven't got it. Sometimes there's disagreement on
whetherto do it at all. That's why I personally like to talk it over with the rest of
them so that when it's finishedand done they can't come back and say it's not
wortha damn.
What do you mean by coming back and saying 'it's not wortha damn'?
. .. If the others were against it and it breaks down, then you're just left on your
own because they say that it was no damn good to start with. Usually, the trouble
is because it would cost too much, and then if it doesn't work 100 percent or if
it costs a bit more than you thought,they say it was no damned good in the first
place. Well, it's more difficultto blame anyone if you all agree firstisn't it?
So other people in the departmentblame each other for this type of thing?
Yeah, there's fingerpointing. Maybe not directly,but you hear about it in a round
about way. It always comes back. They go to [the supervisor]on theirown. "That's
not my idea," that's what they tell him. "I didn't think a damn when it was put
in. That was so and so's idea." But they wouldn't come directly and tell you
themselves. There is a fair amount of this among the general foremen here, but
it's done behind the scene.

On the basis of the intensivestudyof the selectedseriesof cost centers,

it was also foundthat cost centerheads reportinga Budget Constrained
style were more likely to engage in manipulative behavior than those
evaluated in a ProfitConscious or Nonaccountingmanner.The evidence
is thereforesupportiveof hypothesis(d). The manipulationin Budget
Constraineddepartmentswas foundto take threeprincipal forms.First,
cost centerheads attemptedto chargeitemsof cost to othercost centers.
This method,which took advantage of the cost center head's role in
recordingthe basic accountinginformation, was done withsome care so as
to minimizethe chance of detection.The practicewas also morelikelyto
occurwhenthe cost centerheads had recentlyreceivedreportsof unfavor-
able budget variances. It was the firstfranticresponse to a stressful
situation,and in some cases precededthe designand use of moresophisti-
cated meansofmanipulation.
Cost over which the cost center heads were able to exercise some
discretionas to theirtimingand amountrepresentedan importantfocus
8A more complete description of the means of manipulation and their compara-
tive incidence is given in Hopwood, op. cit., pp. 118-58.

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 ACCOUNTING AND PERFORMANCE EVALUATION 171

formanipulativeattempts.In the subject companythis was particularly

trueof repairsand maintenanceexpenditures. To minimizethe total costs,
includingthe opportunitycosts of interruptedproduction,such expendi-
turesshouldideally be incurredat timesof low production.The monthly
repairsand maintenancebudget,however,was determinedon the basis of
the month'sproductionvolume,resultingin a low budgetwhenthe costs
should ideally be incurred.Both interviewevidence and a statistical
analysis of the cost data suggest that the cost center heads who are
evaluated on the basis of a Budget Constrainedstyle,unlike those eval-
uated on the basis of the otherstyles,tendedto time the expendituresin
the light of their effectson the short-termvariances. They tended to
ignorethe morelong-termimplicationsand the elementsof cost whichare
notreflected in the accountingsystem.
The correlationsbetweenmonthlyproductionand monthlyexpenditures
on repairs and maintenancein 1969 were calculated for a series of cost
centers.84In Table 5 the correlationcoefficients are shown for the cost
centersin two departmentswhichhave a similartechnology.One depart-
mentis undera Budget Constrainedsupervisor;the otheris undera Profit
Conscious supervisor.Three of the six cost centersin the Budget Con-
straineddepartmenthave a significantly positivecorrelationand, in addi-
tion, the value of one other coefficient(for cost centerB4) approaches
significanceat the 10 percentlevel. There is thereforesometendencyto do
repairworkat timesof highproductionwhenthe budgetis available, and
so avoid red variances. In contrast,none of the coefficientsforthe eight
cost centersin the ProfitConscious departmentare significantly different
fromzero; decisionson the timingof repairs and maintenanceexpendi-
turesare not made in the lightof currentproductionvolume.
The next analysis is for a single departmentwhere the supervisor
selectivelyuses a Budget Constrainedstyle of evaluation. Four of the
seven cost centerheads in the departmentreportthat theirsupervisoruses
this style,the otherthreereportinganotherstyle. In Table 6 it can be
seen that forthe fivecost centersunderthe responsibilityof personswho
reporta Budget Constrainedstyle,one of the correlationsis significantly

"The analysis presenteda numberof problems.First,some cost centerswere

closed down for a significant portionof the year. Second,repairsand maintenance
expenditures are not separatelyidentifiedforsome cost centers.Both thesesets of
cost centerswere excludedfromthe analysis. Third, different departmentshave
differentprocedures foraccountingforrepairsand maintenance expenditures.In some
departmentssuch costs are separatelychargedto the cost centerresponsiblefor
incurringthe cost. In other departments,importantportionsof such costs are
accumulatedin a departmentalaccount and then allocated to the separate cost
centerson the basis of an engineering estimateof the average expendituresin a
predetermined base period.Essentiallythe portionof the costsso allocatedis beyond
thecontrolof thecostcenterhead.In the analysis,thebasic repairsand maintenance
cost data are thosedirectlycontrolledby the cost centerheads; allocatedcosts are
notincluded.

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172 ANTHONY G. HOPWOOD

positive and another (S2) is close to significanceat the 10 percentlevel.

The correlationsfor the six cost centers under the responsibilityfor
personswho did not reporta Budget Constrainedstyle are all negative,
two reachinga statisticallysignificant level. Again,thereis some evidence
thatthe cost centerheads use a differentdecisionrule.35
A thirdformof manipulationwas available to relativelyfew persons.
Some cost centerheads did, however,attemptto influencethe volume and
typeof production.Threeways of doingthiswerefound:
(1) the creationof "pseudo-production"which only exists in the rec-
ords;
(2) the maintenanceof inventorybufferswhich gave the cost center
head greatercontroloverthe volumeand type of productionin a period;36
(3) attemptsto influencethe productionschedulingdecisionitself.Such
attemptswere instrumentalin makingthe variances more favorablebe-
cause of the insensitivitywith which the accountingsystem reflected
productionchangesand varyingproductmixes.
In summary,the evidenceon the effectsof a Budget Constrainedstyle
of evaluation,wherethis is interpreted as a highrelativeimportancebeing
given to a rigid use of the short-termaccountingdata in performance
evaluation,has supportedthe hypotheses.The use of accountingdata in
termsof a ProfitConscious style does not,however,resultin such unfa-
vorable consequences.

The EffectsofHigh AbsoluteImportanceBeing Attached

to MeetingtheBudget and ConcernwithCosts
We now discuss the effectsof the absolute importanceattached to the
two accountingrelated criteria,where absolute importanceis definedas
the importanceattached to a criterionindependentof that attached to
othercriteria.The evidenceis contraryto the hypotheses.As can be seen
It is interesting to note one effectthis type of manipulation can have on the
usefulnessof the accounting data for analytical work. As the initial step of a program
concerned with achieving a more realistic separation of the fixed and variable
elements of cost, members of the company's accounting department performed a
statistical analysis of the monthly repairs and maintenance cost data for a series of
departments.The analysis was inconclusive. Widely varying patterns of relationships
with production volume were found. However, an examination of their findingson
the basis of the evaluation groups established in this study suggested that the
direction of the relationships with production volume was related to the dominant
style of evaluation used in the department. There is a tendency for a Budget
Constrained use of the accounting data to reinforce the assumptions built into the
accounting system; if some elements of discretionary cost are accounted for as
variable costs, a rigid use of the data will insure that they are incurred in this
manner.
86 Thompson has commented on the role of inventories in absorbing uncertaintyin

organizations. See J. D. Thompson, "Decision-Making, The Firm, and the Market,"

in New Perspectives in Organization Research, ed. W. W. Cooper, H. J. Leavitt, and
M. W. Shelly (New York: John Wiley & Sons, 1964).

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 ACCOUNTING AND PERFORMANCE EVALUATION 173

in Table 7, cost centerheads who reportthat theirsupervisorsattach high

absolute importanceto both meetingthe budget and concernwith costs
are likely to experiencerelativelylow job related tension,althoughthey
do tend to worry about specificmatters affectingtheir costs and the
budget.
There is also a positiverelationshipbetweenthe ratingsof the absolute
importanceof the two criteriaand the cost centerheads' reportsof their
relationswiththeirsupervisors.An examinationof Table 8 reveals that a
high absolute importanceof either criteriais associated with greater
reportedtrust,respectand satisfactionwiththe supervisor.He is seen to
be moreunderstanding of the job problems.It would appear however,that
the improvement in relationsoccurswithoutan easing of job expectations.
A similarbut weaker patternof relationshipsis foundforthe indexesof
peerrelationsreportedin Table 9.
Hence it is onlywhenmeetingthe budgetbecomesimportantin relation
to othervalued criteriaof job performance that unfavorableconsequences
occur. Of itself, concernwith meetingthe budget can result in quite
favorableconsequences.This mightreflectthe fact that one purposeof a
budget is to clearly set out the objectives for a cost center.While this
certainlycannotbe done withperfectaccuracy,it is possible to carefully
and cautiouslyuse the budgetforthispurposeand therebyadd an impor-
tant elementof structureand clarityto the job environment.37 In Table
10 it can be seen that forthe sample as a whole,the perceivedabsolute
importanceof meetingthe budgetis indeed associated withperceptionsof
greatergoal clarity.38However, a more detailed examinationof the data
reveals that the concernwiththe budgethas this effectonly if it does not
achieve high relative importancein performanceevaluation. Significant
positive relationshipsbetween the absolute importanceof meetingthe
budget and goal clarity occur only in the ProfitConscious and Nonac-
countinggroups.
A Nonaccountingevaluation,in particular,mightbe made on the basis
of rathervague criteria: attitudes,the way the cost centerhead handles
37French and his colleagues have commented on the advantage of specific job
goals. See J. R. P. French, Jr., E. Kay and H. H. Meyer, "Participation and the
Appraisal System," Human Relations, XIX (1966), 3-19. The literature on the
relationship between goal specificity,and organizational and personal variables is
reviewed by E. A. Locke, "Toward a Theory of Task Motivation and Incentives,"
Organizational Behavior and Human Performance, III (1968), 157-89, and T. F.
Lyons, "Role-Clarity, Satisfaction, Tension and Withdrawal," Organizational Behav-
ior and Human Performance,VI (1971), 99-110.
38The index of perceived goal clarity is based on responses to the question: "Do
you know what is expected of you in your job?" Respondents were asked to select
one of four responses varying from "I am very sure of what is expected of me" to "I
am not at all sure of what is expected of me." In the table, the Budget Constrained
and Budget-Profitgroups have been combined so as to increase the size of the group
for analysis. This is done on the basis of the evidence which suggests that there is no
significantdifferencebetween the two groups (see footnote39 below).

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174 ANTHONY G. HOPWOOD

his men, and effort.While such criteria are important,they are sur-
roundedby a great deal of uncertainty.It is difficultto clearly specify
what constitutesgood and bad performance,and a supervisormightfindit
to
difficult determine when improvement occurs. In these circumstances,
the budgetarysystemoffersone definiteadvantage.It attemptsto express
the units'objectivesin a precisemanner.

Discussion
The importantmanagementdilemmawhichprovidedthe basis forthe
presentstudy also serves to highlightthe relevance of the findings.Al-
thoughaccountingdata are oftenthe most importantformalsources of
information in an organization,attemptingto reflectmatterswhichare of
vital concern,they are usually incompleteand even biased indicatorsof
managerialperformance. A managermay want to make his subordinates
aware of the relevantaspects of the data, and yet to use the data in their
appraisal is potentiallyinequitable, and may encourage defensivebe-
havior which is contraryto the very goals of the organizationthe ac-
countingsystemwas designedto serve.
The study clearly demonstratesthe real importanceof the mannerin
whichaccountingdata are used. Accountingdata do not in of themselves
pose a threatto membersof an organization,and theirimperfections need
not necessarilybe seen as unjust when they are used in performance
evaluation.A manageris not thereforefaced witha simplechoicebetween
using or not using the data in performanceevaluation. Instead, he can
reap many of the benefitsof the accountingsystemby stressingfactors
which it attemptsto measure withoutthis resultingin eitheremotional
costs for the persons being evaluated or defensivebehavior which is
dysfunctionalfor the organization.To do so, however,he must, in the
termsof the study,use the accountingdata in a mannerconsistentwitha
ProfitConscious style of evaluation ratherthan a Budget Constrained
style.
The distinctionbetweenthe two stylesis a crucialone.39A concernwith
accountingdata, whichis oftenso vital forthe efficiency of an organiza-
tion,is acceptedby the cost centerheads so long as the data are used with
care and the budgetvariances are not emphasizedat the expenseof other
valued performancecriteria.Cost centerheads are satisfiedwith an in-
The evidencesuggeststhat the Budget Constrainedand ProfitConsciousstyles
are distinctand that it is not possibleto successfully combinethem.The Budget
Constrainedstyle dominatesin the conflicting situation.Seventeenindexesof de-
pendentvariableshave been presentedin Tables 1 to 4. In all cases thevalues forthe
Budget Constrainedgroup were not significantly differentfromthe Budget-Profit
group.In contrast,in 12 cases the values for this latter group were significantly
differentfromthoseforthe ProfitConsciousgroup.One of the fivecases wherethey
differ
did not significantly is forthe cost tensionindex.It will be remembered that
we notedthatall theaccounting relatedstylesresultedin highcosttension.

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 ACCOUNTING AND PERFORMANCE EVALUATION 175

creased absolute importancebeing attached to both their concernwith

costs and the extentto which they meet the budget,the latter possibly
helpingto clarifythe job environment and goals. They are satisfiedwith
the ProfitConscious styleof evaluation even thoughit certainlydoes not
resultin easier job requirements.It is a demandingstyle and, as we have
seen, produces a high level of cost tension,but it is accepted and re-
spected,and resultsin significantly less tension,rivalry and ill feelings
thantheBudgetConstrainedstyle.
The Profit Conscious style appears to be one aspect of a problem
solvingstyle of management,as distinctfroma style whichattemptsto
imposea false measureof cognitivesimplicityonto a complexand highly
interdependent series of activities.The accountingsystem is seen as a
valuable, althoughat timesimperfectaid to management,and its reports
are used in a creativemanner,servingas a bias forinquiryand a source
of ideas for change."He throws'if' into our cost statements.The cost is
thisor that,so throwan 'if' in and findthe cost savings forthe year and
for a month."The data are not, however,automaticallytaken at their
face value. Rather, the Profit Conscious supervisorprobes into their
significanceand meaning,supplementing themby many othersourcesof
information,both formaland informal,so that the alternativescan be
compared and the inconsistenciesinvestigated.All these are processes
which allow a continualtest of the validity of the accountingdata and
whichhelp to maintainthe healthy,indeedessentialelementof skepticism
in relationto the data.
In contrast,the Budget Constrainedstyle is one in which the evalua-
,tionof performanceis of primaryimportance,influencingall aspects of
the supervisor'sand the cost centerhead's behavior. Evaluation is not
viewed as an ongoingpart of the managerial process,interrelatedwith
otherimportantaspects of the job, and just one aspect of the process of
influence.Rather, it is seen as a distinctand dominantactivity,and the
primarysource of influenceand control,overshadowingothervital ele-
mentsof the process.The budgetbecomesnot an aid to problemsolving
but a constrainton it, resultingin shorttime horizonsand a sluggishand
inflexibledecisionprocess.In the wordsof one interviewee:
[A Budget Constrained supervisor] takes the budget to heart, while what [a
ProfitConscious supervisor] does is accept it upon himself and if he doesn't agree
with it then he'll reject the budget. He's a much tougher guy and it's difficultto
argue with him. You have got to have some good arguments,but if he agrees with
you then out goes the budget. [The Budget Constrained supervisor] can be stub-
born. He aims to stay righton his budget, and that's that.

Althoughthe studyhas illustrateda numberof the importanteffectsof

these differentways of using accountingdata in performanceevaluation,
it has not been directlyconcernedwith the overall effectson the final
efficiencyof operations.This was partly because in the subject company,

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176 ANTHONY G. HOPWOOD

as in many organizations,the available indexesof efficiency are based on

the accountingdata and may therefore reflect both real and
efficiency
successful manipulation of the data. Nevertheless, the issue is both of
immediate concernto the manager and of importancein placing the
observedeffectsin a widerorganizationalcontext.Accordingly,while the
need forfurtherresearchis recognized,it is worthwhileto brieflyreview
the available evidencewhich,althoughincomplete,is suggestive.
While boththeBudgetConstrainedand ProfitConsciousstylesresultin
a concernwith costs, only the ProfitConscious supervisorachieves this
concernwithoutthe costlydysfunctionaldecisionmakingand manipula-
tion of the data. Examples were found of decisions taken in Budget
Constraineddepartmentswhich resultedin higherprocessingcosts, less
innovativebehavior and a poorer quality service to the customer,and
wherethe manipulationof the data reducedtheirusefulnessforanalytical
purposes.40In addition,the climate of distrustand rivalry which is a
consequenceof the Budget Constrainedstyleis also of importancebecause
it is knownthat in many situationssuch factorscan influencelong-term
performanceand success.4'The presenceof the type of tensionand con-
flictobservedbetweenmembersof a Budget Constraineddepartmentcan
oftenimpede the cooperation,mutual help and assistance which are so
essentialforcontrollinginterdependent activitiesand maintaininga flexi-
ble response to unusual circumstances.These are problems which are
nowherenear so prevalentwith eithera ProfitConscious or Nonaccount-
ing style, a findingwhich should be borne in mind when the relative
advantages and disadvantagesof the latter style in particularare being
considered.
The evidence is certainlysuggestivethat a ProfitConscious style is
likely to result in a highergeneral level of efficiency than the Budget
Constrainedstyle.Nevertheless,the possibilitydoes remainthat it is still
betterto place at least some emphasis on the accountingdata: in other
words, some persons could indeed argue that the Budget Constrained
style,despiteits advantages,resultsin greaterefficiency than the Nonac-
countingstyle.
A numberof the issues mentionedabove are relevantto this important
question,althoughthere obviously remainsa need for furtherresearch.
Whilethe cost associatedwiththe difficultiesof controlling interdependent
operations,the short-timehorizons,the manipulatedaccountingdata and
the climateof distrustare oftenimportant,theirimpact on the efficiency
of operationswill vary fromsituationto situation.The precisebalance of
costs and benefitsmay be differentforthe controlof a stable,technologi-
cally simple situationthan for the controlof an uncertainand highly
I
Some examples have been referredto above, but for a more complete discussion
see Hopwood, op. cit.
" Georgopoulos and Tennenbaum, op. cit.

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 ACCOUNTING AND PERFORMANCE EVALUATION 177

complexsituation.Rather than tryingto unnecessarilygeneralizeat this

early stage, it is essentialthat some furtherattemptsbe made to isolate
the conditionsinfluencing the relativeadvantages of the various stylesof
evaluation.
In addition,the Nonaccountingstyle has been regardedas a residual
categoryin the presentstudyand we have investigatedneitherits nature
and varietynor the implicitassumptionbehind the design of many ac-
countingsystemsthat efficiency is dependentupon the ratherdirectuse of
accountingdata in evaluation by supervisors.42 Yet it is possible that in
at least some of the so-called Nonaccountingevaluations,the accounting
data may representan importantmeans of feedbackto a cost centerhead,
influencing his self-evaluationand subsequentbehavioreven thoughthey
are relativelyunimportant in his superior'sevaluation.
Some measure of subordinatedefensivenessmay be a reaction to all
formsof evaluation by a superior.For instance,one groupof researchers
foundthat managers'attemptsto assist subordinatesby indicatingareas
forimprovementwere likely to be seen as a threatby the subordinates
and frequentlyresulted in defensiveness.43 In which case, the present
studyhas been concernedwith differences in the level of threat,and it is
possiblethat even the ProfitConsciousstyledoes not representan optimal
solutionto the problem.Rather,a greaterregardforthe cost centerhead's
self-motivation to be concernedwith the accountingdata may result in
bothefficient operationsand an even lowerlevel ofthreat.44
Such factorsrepresenta significantand importantdirectionforfurther
research.More considerationneeds to be givento the precisecharacteris-
tics of the various styles,their implicationsfor organizationaleffective-
ness and the conditionsinfluencing theirrelative advantages. While the
researchfindingshave suggestedthe outlineof a perspectiveforviewing
the differential use of accountingdata in performanceevaluation, our
knowledgeof the subject is still rudimentary.It can, however,best be
advanced by further empiricalresearch.
42E. H. Caplan, "BehavioralAssumptionsof ManagementAccounting,"The Ac-
countingReview, XLI (1966), 496-509.
' E. Kay, H. H. Meyer and J. R. P. French,Jr., "Effectsof Threat in a
Performance Appraisal Interview," Journal of Applied Psychology, XLIX (19%5),
are madeby N. R. F. Maier in his The AppraisalInterview:
311-17.Similarcomments
Objectives, Methods and Skills (New York: John Wiley & Sons, 1958).
" Bassett and. Meyer found that a self-appraisalpreparedby the subordinate
resultedin less defensivebehaviorand a greaterperceivedimprovement in perform-
ance than superior-review. See G. A. Bassett and H. H. Meyer, "Performance
AppraisalBased on Self-Review," PersonnelPsychology,XXI (1968),421-30.

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178 ANTHONY G. HOPWOOD

TABLE 1
The Effectsof the Styte of Evaluation on Job Related Tension and Specific
Cost Tension

Styleof evaluation
_______ ______ __ ___ ______ ______ Significance of paired
comparisonsa
BC BP PC NA

Job related tensionb 2.55 2.42 2.11 2.16 BC v. PC:p < .01
BC v. NA:p < .05
BP v. PC:p < .05
Cost tensionb 2.81 2.78 2.81 2.42 BC v. NA:p < .05
BP v. NA:p < .05
PC v. NA:p < .05

a Significance tests are based on the Mann-Whitney U Test. Unless otherwise

stated a paired comparison is not significant at the 5 percent level.

b Both indexes have been expressed as values on a 5-point scale ranging from 1 to
5.

TABLE 2
The Effects of the Style of Evaluation on the Perceived Justness of Evaluation

Styleof evaluation
ofpaired
Significance
comparisonsa
BC BP PC NA

Justness ofevaluationb 3.30 3.63 4.17 4.00 BC v. PC:p < .01

BC v. NA:p < .01
BP v. PC:p < .05

a
Significance tests are based on the Mann-Whitney U Test. Unless otherwise
stated, a paired comparison is not significant at the 5 percent level.
b The index has a possible range of 1 to 5.

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 ACCOUNTING AND PERFORMANCE EVALUATION 179

TABLE 3
The Effectsof the Style of Evaluation on Reported Relations with the Supervisor

Styleof evaluation
Styleofevaluation
Index of relations with Significance of paired
the supervisora
BC BP PC NA comparisonib

Trust in supervisor 3.26 3.06 4.24 3.98 BC v. PC: p < .01

BC v. NA:p < .05
BP v. PC:p < .01
BP v. NA:p < .01
Respect forsupervisor 3.67 3.82 4.60 4.33 BC v. PC:p < .01
BC v. NA:p < .01
BP v. PC:p < .01
BP v. NA:p < .05
Supervisor'sunderstanding 3.27 3.18 4.09 3.89 BC v. PC:p < .01
BC v. NA:p < .01
BP v. PC:p < .01
BP v. NA:p < .01
Reasonablenessofsupervisor's 3.12 3.13 3.44 3.49 BC v. NA:p < .05
expectations BP v. NA:p < .05
Satisfactionwithlsupervisor-3.36 3.53 4.40 4.11 BC v. PC:p < .01
administrative BC v. NA:p < .01
1P v. PC:p < .01
BP v. NA:p < .01
Satisfaction-technical 3.42 3.75 4.42 4.21 BC v. PC:p < .01
BC v. NA:p < .01
BP v. PC:p < .01
BP v. NA:p < .05
Satisfaction-humanrelations2.97 2.81 4.14 4.05 BC v. PC:p < .01
BC v. NA:p < .01
BP v. NA:p < .01
BP v. NA:p < .01
Satisfaction-general 3.33 3.47 4.58 4.38 BC v. PC: p < .01
BC v. PC:p < .01
BP v. PC:p < .01
BP v. NA:p < .01

a All the indexeshave been coded on a scale of 1 to 5 foreach case of comparison.

b Significancetests are based on the Mann-WhitneyU Test. Unless otherwise
stated,a pairedcomparisonis notsignificant at the5 percentlevel.

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180 ANTHONY. G. HOPWOOD

TABLE 4
The Effectsof the Style of Evaluation on Reported Relations with Peers

Styleof
Index ofrelations evaluationSignificance of paired
withpeersa - comparisonsb
BC BP PC NA

Peer supportiveness- 3.59 3.57 3.84 3.87 BC v. PC:p < .05

achievement BP v. PC:p < .05
BP v. NA:p < .05
Peer supportiveness- 3.28 3.12 3.65 3.75 BC v. PC:p < .05
affiliation BC v. NA:p < .01
BP v. PC:p < .01
BP v. NA:p < .01
Peer agreement 3.36 3.35 3.72 3.76 BC v. PC:p < .01
BC v. NA:p < .01
BP v. PC:p < .05
BP v. NA:p < .01
Peer helpfulness 3.76 3.76 4.02 4.18 BC v. NA:p < .01
BP v. NA:p < .05
Respect forpeers 3.73 4.00 4.10 4.14 BC v. PC:p < .05
BC v. NA:p < .05
Peer friendship 3.31 3.40 3.71 3.65 BC v. PC:p < .05
a All scales have been coded on a scale of1 to 5 forease ofcomparison.
b Significancetests are based on the Mann-Whitney U Test. Unless otherwise
at the 5 percentlevel.
stated,a pairedcomparisonis notsignificant

TABLE 5
Correlations Between Monthly Production and Repairs and Maintenance
Expenditures, 1969, for Two Departments

BudgetConstraineddepartment ProfitConsciousdepartment

Correlationbetween Correlationbetween
Cost centercode monthlyproductionand Cost centercode monthlyproductionand
R & M expenditures R & M expenditures

BI 0.82* NB1 0.21

B2 0.81* NB2 0.13
B3 0.61* NB3 0.12
B4 0.46 NB4 0.05
B5 0.28 NB5 -0.13
B6 0.02 NB6 -0.15
NB7 -0.16
NB8 -0.32

* Significantat p < .05.

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 TABLE 6
CorrelationsBetweenMonthlyProduction and Repairs and Maintenance Expenditures,
1969, for Cost Centers in a Department Where the Supervisor Selectively Uses a
Budget Constrained Style of Evaluation

Cost centerswherethe cost centerhead reports Cost centerswherethe cost centerhead reports
thatthesupervisor uses a Budget thatthe supervisordoes not use a
Constrainedstyle BudgetConstrainedstyle

Correlationbetween Correlationbetween
Cost centercode monthlyproductionand Cost centercode monthlyproductionand
R & M expenditures R & M expenditures

Si 0.52* S6 -0.02
S2 0.49 S7 -0.26
S3 0.19 S8 -0.36
S4 0.01 S9 -0.39
S5 -0.01 Slo -0.54*
S1l -0.59**
* Significantat .05 < p < .10.
** Significantat p < .05.

TABLE 7
The Relationship Between the Absolute Importance of Meeting the Budget and
Concern with Costs, and Job Related Tension and Cost Tension
(Kendall's Tau)

The cost centerheads' perceptionsThe cost centerheads' perceptions

of the absoluteimportance of of the absoluteimportanceof
meetingthebudget concernwithcosts

Job relatedtension _0.18* -0.29*

Cost tension 0.31* 0.31*
* Significantat p < .01.

TABLE 8
The Relationship Between the Absolute Importance of Meeting the Budget and Concern
with Costs, and Reported Relations with the Supervisor (Kendall's Tau)

The cost centerheads' The cost centerheads'

Index of relationswith perceptionsof the absolute perceptionsof the absolute
thesupervisor importanceof meeting importance of concern
the budget withcosts

Trust in supervisor 0.29* 0. 27*

Respect forsupervisor 0.30* 0.28*
Supervisor'sunderstanding 0. 23* 0. 20*
Reasonableness of supervisor'sex- -0.07 0.00
pectations
Satisfaction with supervisor-ad- 0.16* 0.16*
ministrative
Satisfactionwithsupervisor-techni- 0.30* 0.28*
cal
Satisfactionwithsupervisor-human 0. 28* 0. 26*
relations
Satisfaction with supervisor-gen- 0.18* 0.17*
eral
* Significantat p < .01.
181

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182 ANTHONY G. HOPWOOD

TABLE 9
The Relationship Between the Absolute Importance of Meeting the Budget and Concern
with Costs, and Reported Relations with Peers (Kendall's Tau) .

The cost centerheads' The cost centerheads'

Index of therelations perceptionsof theabsolute perceptionsof theabsolute
withpeers importance ofmeeting importanceofconcern
thebudget withcosts

Peer supportiveness-achieve- 0. 19** 0. 14**

ment
Peer supportiveness-affiliation 0. 19** 0.14**
Peer agreement 0.13** 0.17**
Peer helpfulness 0.10* 0. 14**
Respect forpeers 0.02 0.08
Peer friendship 0.03 0.02

Significant at p < .05.

*

* Significant at p < .01.

TABLE 10
Relationship Between the Absolute Importance of Meeting the Budget and
Perceived Goal Clarity (Kendall's Tau)

Evaluationgroups
T otal _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
sample _
BC &BP PC NA

Relationshipbetweenabsoluteimpor- 0. 17** 0.10 0.21* 0.22**

tanceofmeetingthebudgetand goal
clarity
* Significantat p < .05.
** Significant at p < .01.

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