By Zachary T. Mohr Submitted to the graduate degree program in the School of Public Affairs and ...

191 Pages·2013·1.94 MB·English

COST ACCOUNTING IN US CITIES: TRANSACTION COSTS AND GOVERNANCE FACTORS AFFECTING COST
ACCOUNTING DEVELOPMENT AND USE

By

Zachary T. Mohr

Submitted to the graduate degree program in the School of Public Affairs and Administration
and the Graduate Faculty of the University of Kansas in partial fulfillment of the requirements
for the degree of Doctor of Philosophy.

________________________________
Alfred Tat-Kei Ho, Committee Chair
________________________________
Jacob Fowles
________________________________
John Nalbandian
________________________________
Chris Silvia
________________________________
Rajendra P. Srivastava

Date Defended: March 28th, 2013
The Dissertation Committee for Zachary T. Mohr
certifies that this is the approved version of the following dissertation:

COST ACCOUNTING IN US CITIES: TRANSACTION COSTS AND GOVERNANCE FACTORS
AFFECTING COST ACCOUNTING DEVELOPMENT AND USE

________________________________
Alfred Tat-Kei Ho, Committee Chair

Date approved: April 22nd, 2013

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Abstract

Cost accounting in government is a topic that has an oddly uncertain place in financial
management. Many people know what it is as an ideal construct but do not know what it is in
practice. This uncertainty of practice and strong expectations about what it should be creates a
tightrope that must be consciously attended to and exacts a toll on those who study its
practice. For example, activity based costing, or ABC, was generally presumed to be the state
of the art for cost accounting in government (Geiger, 2010). While there has been much
research about cost accounting in the context of private organizations, the literature on cost
accounting in public organizations has not kept pace with its development for the past two
decades, especially when many public organizations are experiencing fiscal stress and there is a
renewed interest in the subject of cost measurement and containment. This thesis reviews the
development of cost accounting research and practices, including the practice of a hybrid of
traditional cost accounting and ABC. The research then applies transaction cost theory and a
variety of contextual factors that are supported in the literature to create a theoretical model
of how cost accounting is used in public organizations. The model is tested on a case study of
an ABC implementation in a small city. The insights from this analysis are corroborated through
the analysis of the cost accounting practices in a sample of 30 large US cities. The hierarchical
logistic regression of 1122 services in these cities finds that the transaction cost variables of
asset specificity and uncertainty are significant factors that influence which services get
measured in the cost accounting plans. The final empirical chapter looks at why cost
accounting is used in US cities and shows that fiscal stress is related to US cities using cost
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accounting. The last chapter draws conclusions from the current research and discusses
avenues for future research.

iv
Acknowledgements

This dissertation would not have been possible without the help and guidance of many people.
They have helped me along the way and I want to acknowledge their valuable contributions.
The final product would not have been nearly as good without their help and the journey would
not have been nearly as rewarding. In the language of transaction cost theory, uncertainty
creates a transaction cost to those who want to study it. While this dissertation had some of
those transaction costs, it has also had transaction benefits. I will be always grateful to my
Committee Chair, Dr. Alfred Ho, for pointing out those benefits. He read through many drafts
and always provided transaction benefits. My committee also provided invaluable support and
insight over the last four years. Dr. Raj Srivastava from the Accounting Department not only
put up with my dissertation, but also my unusual questions of practice and theory in his
Advanced Managerial Accounting class. Dr. John Nalbandian and Dr. Chris Silvia provided
helpful comments in their areas of expertise that have made me think more deeply about these
other areas of local government. Dr. Jacob Fowles deserves special thanks for not only reading
drafts and providing comments, but also for answering my myriad questions about so many
things related to (and sometimes not related to) public financial management. The other faculty
at the School of Public Affairs and Administration also deserve a great deal of recognition.
Making time for me (which is a cost that someone who studies cost accounting truly
appreciates), the faculty offered an exceptionally supportive environment for a doctoral
student.
In addition to exceptional faculty, the University of Kansas has strong partnerships with
an extraordinary range of practitioners with excellent experience in cities and public
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organizations. The KU public administration graduates (known as KUCIMATS - Kansas
University City/County Managers and Trainees) provided early and continuing support for this
dissertation. Their professional insights were invaluable to this research. Along with the
graduates of KU public administration, I need to thank the hundreds of city finance and
budgeting staff in many communities that have helped with this and other research projects
over the years. It is usually only with their assistance that academic public administration can
have insight into the practice of financial management in public administration.
At the east entrance of Wescoe Hall, there is a sign that reads “It takes a campus to
graduate a student.” In my case, that is especially true. I want to thank Paul Johnson and
Aaron Bolton at the Center for Research Methods and Data Analysis, Paul Mason and the KU
Accounting Department, and Liana Silva at the KU Writing Center. I gratefully acknowledge the
financial support during my first and last year of the University of Kansas Fellowship, which was
facilitated by the work of Dr. Charles Epp in the School of Public Affairs and Administration.
I also want to thank cost accounting professionals Bret Schlyer and Dr. Dale Geiger for
answering questions and sharing stories about cost accounting. Dr. Justin Marlowe provided
early helpful comments on cost accounting and contributed greatly to my interest in public
accounting and financial management.
The doctoral students of the University of Kansas attended my presentations on cost
accounting. The non-budget and finance students that attended my presentations on
government cost accounting went beyond the call of professional duty. Happily, they have
supported me in this endeavor.
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Most significantly, my wife Ashley has offered a great deal of support over the last four
years. I hope that she enjoys the irony of me doing a dissertation on cost accounting.

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Table of Contents
Table of Contents ..................................................................................................................................viii
List of Illustrations ................................................................................................................................... x
List of Acronyms .................................................................................................................................... xii
Chapter 1: Introduction ........................................................................................................................... 1
The Need for Cost Management in Government .................................................................................. 5
A Recent History of Cost Accounting Research ................................................................................... 16
Chapter Conclusion: The Need for a New Public Sector Cost Accounting Research Agenda ................ 21
Chapter 2: Theories of Public Sector Cost Accounting Utilization ........................................................... 22
Positive Accountancy Theory ............................................................................................................. 23
The Bureaucratic Politics of Cost Accounting in Cities ........................................................................ 26
Transaction Cost Theory .................................................................................................................... 35
Other Contextual Factors and Cost Accounting Use ........................................................................... 41
Chapter Conclusion: The Theoretical Model....................................................................................... 47
Chapter 3: Cost Accounting and Cost Management in US Cities ............................................................ 49
A Note on the Language of Cost Accounting Systems ......................................................................... 50
Traditional Cost Accounting ............................................................................................................... 53
Activity Based Costing........................................................................................................................ 57
Hybrid Cost Systems: Between Traditional Cost Accounting and ABC ................................................. 65
Comparison of the Three Systems...................................................................................................... 68
Cost Management: Using Cost Accounting and Management for More than Reporting ..................... 69
Chapter Conclusion: Possibilities and Limitations of Different Types of Cost Accounting .................... 74
Chapter 4: The Missing Cost in Cost Accounting: A Qualitative Case Analysis ......................................... 75
Research Expectations for the Small Government Case ...................................................................... 76
Study Design, Data, and Methods ...................................................................................................... 77
Case Background ............................................................................................................................... 79
The Relationship between Fiscal Stress, Slack Resource, and ABC Implementation ............................ 81
Transaction Cost Influences ............................................................................................................... 83
Additional Benefits of ABC: Budget, Management, and Performance ................................................. 87
Contextual Factors in Implementation ............................................................................................... 91
Case Study Conclusions...................................................................................................................... 92
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Chapter 5: Cost Accounting at the Service Level: A Transaction Cost Analysis ........................................ 95
Research Expectations for the Determinants of Cost Accounting of Services ...................................... 95
Empirical Model of Service Level Cost Accounting .............................................................................. 97
Description of Cost Accounting and Transactions Cost Data ............................................................... 98
Hierarchical Models of Cost Accounting at the Service Level ............................................................ 102
Discussion of Model Results............................................................................................................. 105
Conclusions on the Analysis of Service Level Cost Accounting .......................................................... 108
Chapter 6: Why Do U.S. Cities Utilize Cost Accounting? An Analysis of Four Common Reasons ........... 109
Literature and Expectations ............................................................................................................. 110
Four Reasons: Rate Setting, Performance Netting, Grant Getting and Blood Letting ..................... 110
Institutional Control Variables ..................................................................................................... 116
Data and Method ............................................................................................................................ 118
Analysis ........................................................................................................................................... 120
Conclusion ....................................................................................................................................... 121
Chapter 7: Toward a Theory of Governance and Financial Management .............................................. 123
Cost Accounting Practices in Cities ................................................................................................... 124
Cost Accounting as a Contribution to the Contracting and Governance Literature ........................... 130
Toward a Theory of Governance and Financial Management ........................................................... 132

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List of Illustrations
(In order of presentation)

Figure 1.1: Percentage Savings or Loss-State and Local Aggregate 1960-2010…………………………………….136
Table 1.1: State and Local Government Fiscal Stress 1960-2010………………………………………………………….137
Figure 1.2: State and Local Surplus (Deficit) as % of GDP……………………………………………………………………..138
Figure 2.1: Positive Accountancy Model………………………………………………………………………………………………139
Figure 2.2: Different Cost System Preferences by Principal and Agent…………………………………………………140
Figure 2.3: Implemented Cost System Differs from Optimal System…………………………………………………….141
Figure 2.4: Transaction Costs Reduce the Optimal Level of Cost Accounting……………………………………….142
Figure 2.5: Multiple Transaction Costs Leads to Multiple Optima………………………………………………………..143
Figure 2.6: Transactions Cost of Uncertainty from Cost Measurement………………………………………………..144
Figure 2.7: Transaction Cost and Uncertainty Reductions Affect Optima…………………………………………….145
Figure 2.8: Theoretical Model of Cost Accounting Use at the Service Level………………………………………….146
Figure 3.1: Traditional Cost Accounting Example…………………………………………………………………………………147
Figure 3.2: Activity Based Cost Example……………………………………………………………………………………………….148
Figure 3.3: Hybrid Cost Accounting Example………………………………………………………………………………………..149
Table 3.1: Key Attributes of Cost System Difference…………………………………………………………………………….150
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