When Do Opportunity Costs Count? TheImpact of Vagueness, Project Completion
Stage, and Management AccountingExperience
Lisa Marie VictoravichUniversity of Denver
ABSTRACT: Management accountants have recently migrated toward a business part-ner role, and as a result they often assist management with the decision-making pro-cess. Thus, it is imperative that they excel at identification of relevant information suchas opportunity costs. This study experimentally tests the prediction that managementaccounting experience mitigates the tendency to ignore opportunity costs with respectto two factors: opportunity cost vagueness and project completion stage. This studyalso investigates whether attending to opportunity costs has an impact on project con-tinuance decisions. Results indicate that management accounting experience mitigatesthe effect of vague opportunity costs and project completion stage. It was also foundthat attention to opportunity costs acts as mediator and this in turn reduces the ten-dency to continue an existing project. This suggests that attending to opportunity costsinfluences decision-making and that it is likely to have an economic consequence.
Keywords: opportunity costs; vagueness; management accounting experience;project completion stage.
Data Availability: Contact the author.
INTRODUCTION
Opportunity costs are incurred whenever a decision-maker must choose between two ormore courses of action; however, they are commonly overlooked by decision-makers. Theopportunity cost concept is a fundamental component of classical economic theory and is
measured as the benefit forgone due to choosing an alternative course of action �Heymann andBloom 1990�. In this study, I show that management accounting experience mitigates this dys-functional tendency to overlook opportunity costs as documented by prior studies �Becker et al.1974; Neumann and Friedman 1978; Friedman and Neumann 1980; Hoskin 1983�. This suggests
I appreciate the helpful comments of Bud Fennema, Greg Gerard, Doug Stevens, Neil Charness, Bill Buslepp, participantsat the Florida State University and University of Denver research workshops, and participants of the 2008 MidyearMeeting of the Management Accounting Section of the American Accounting Association. I also gratefully acknowledgemembers of the Institute of Management Accountants �IMA� for their willingness to participate in my study.
BEHAVIORAL RESEARCH IN ACCOUNTING American Accounting AssociationVol. 22, No. 1 DOI: 10.2308/bria.2010.22.1.852010pp. 85–108
Published Online: January 2010
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that the tendency to ignore opportunity costs is not a permanent cognitive deficiency but rathersomething that can be unlearned. My study tests the strength of management accounting experi-ence in mitigating this tendency by introducing factors into the decision-making setting thatshould negate attention to opportunity costs. Finally, I show that attention to opportunity costsmediates the relationship between project continuance and the factors of interest and thus isconsequential to financial decisions.
The factors examined in this study include opportunity cost vagueness and project completionstage. Prior research has typically presented opportunity costs in a precise manner, which isinconsistent with how they would appear in a realistic setting. Since opportunity costs are future-oriented, they are likely to be uncertain and therefore will be represented as an estimate. Forexample, a fixed asset might have a disposal value of an estimated amount plus or minus a range.It is also likely that decision-makers will consider whether additional resources should be allo-cated to projects at various stages of completion. For instance, a project that is under considerationfor future resources may be at an initial stage of completion �e.g., 10 percent complete� or close tocompletion �e.g., 90 percent complete�.
Opportunity cost vagueness will likely reduce attention to opportunity costs, since decision-makers have been shown to avoid or discount vague situations �Camerer and Weber 1992� andinformation �Van Dijk and Zeelenberg 2003�, especially when feeling incompetent or unknowl-edgeable in a particular area �Heath and Tversky 1991; Goodie 2003�. Prior research has alsoshown that decision-makers have a natural tendency to finish what they started, especially when itis near to completion �Conlon and Garland 1993; Boehne and Paese 2000�. This bias towardproject completion will likely reduce attention to opportunity costs when identifying relevantinformation for decisions regarding continuance of an in-progress project. It is important to attendto opportunity costs since failing to integrate them as relevant information will likely bias deci-sions toward continuing projects that are unprofitable.
The ability of management accounting experience to mitigate the effect of these factors on thetendency to attend to opportunity costs was tested by investigating decision-makers’ performanceat a task highly relevant to the managerial accounting profession. This task consisted of a searchfor relevant information for use in a resource allocation analysis. Management accounting expe-rience and the task of searching for relevant information is of interest to accounting research, sincea primary responsibility of management accountants is to provide management with sound adviceabout costs and benefits which affect business plans. Furthermore, over time management accoun-tants have transformed from serving the accounting profession as “bean counters” to “businesspartners,” and as a result they are spending more time involved with strategic and operationaldecision-making �Siegel 1999, 2000; Siegel et al. 2003�.
Despite having access to highly sophisticated accounting systems, some of the most importantinformation is not reported by these accounting systems. Given that management accountants aregathering, analyzing, and interpreting information for use in organizational decision-making, it isimportant that they excel at these tasks. Thus, it is imperative that they develop the necessaryknowledge that enables them to identify relevant information such as opportunity costs even in thepresence of situational factors that may negate attention to this information.
This study also investigates the benefits of attending to opportunity costs for improving theoverall quality of judgment and decision-making. I am particularly interested in whether thelikelihood of allocating additional resources to an in-progress project is influenced by incorporat-ing opportunity costs as relevant information for use in a decision analysis. I investigate thiscognitive process by examining attention to opportunity costs as a mediating variable between theindependent variables of interest �opportunity cost vagueness and project completion stage� anddecision-makers’ propensity to continue a project.
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Path analysis was used to investigate the causal relationship between the independent vari-ables �opportunity cost vagueness, project completion stage�, the moderating variable �manage-ment accounting experience in years�, the mediating variable �number of opportunity costs at-tended to�, and the dependent variable �project continuance�. A case-based scenario that describesthe current progress and resources necessary to complete an internal logistics project was em-ployed. Participants were asked to perform an analysis of the project and decide whether it shouldbe continued.
The first independent variable, opportunity cost vagueness, was operationalized by presentingthe six embedded opportunity costs in the case as either precise or vague. Project completion stagewas operationalized by varying whether the project was at an early stage of completion �10percent complete� or late stage of completion �90 percent complete�. The moderating variable,management accounting experience, was measured as years of management accounting experiencereported by participants. Data were collected from two groups of participants who had varyingamounts of management accounting experience. These groups included members of the Instituteof Management Accountants �IMA� and upper-level accounting major students at a large stateuniversity.
The remainder of this paper is organized as follows. In the next section, I discuss relevantliterature and develop the hypotheses. This is followed by a discussion of the experimental designand the method used in testing the hypotheses. The final two sections discuss the study’s resultsand provide related conclusions and limitations.
THEORY AND HYPOTHESESDomain Experience, Knowledge, and Performance Relationship
Domain experience is the result of participation in events or tasks �e.g., capital project analy-sis� associated with a particular discipline �e.g., management accounting�, which facilitates thecreation of knowledge stored in memory �Libby 1995; Vera-Muñoz et al. 2001�. Prior research hasindicated that this knowledge gained from experience improves performance on judgment anddecision-making tasks �Bonner et al. 1997; Nelson 1993; Nelson et al. 1995�. This is consistentwith the Libby �1995� antecedents and consequences of knowledge model, which predicts thatexperience creates knowledge which in turn drives performance.
Instruction generates declarative knowledge and practice generates procedural knowledge�Anderson 1983�. Declarative knowledge is knowledge of facts �e.g., relevant information in-cludes outlay costs and opportunity costs�. Thus, students in a managerial or cost accountingcourse will have gained the basic declarative knowledge of what is considered relevant or irrel-evant information. Procedural knowledge is the use of declarative knowledge, which underlies theability to perform a task �e.g., how to quantify, identify, and search for relevant information for usein decision-making�. Experienced management accountants such as a controller will have gainedthe procedural knowledge necessary to identify relevant information for use in decision-makingtasks such as capital budgeting or forecasting. Thus, the key to excelling at a particular domaintask is procedural knowledge developed through experience in a specialized domain �Anderson2000; Herz and Schultz 1999�.
Findings from prior research indicate that knowledge gained from management accountingexperience enables superior performance at identification of opportunity costs as relevant infor-mation for use in decision-making. Vera-Muñoz et al. �2001� found that individuals with highlevels of management accounting experience identified more relevant information in the form ofopportunity costs only when they chose a cash flow problem representation. However, priorresearch does not provide evidence as to whether management accounting experience and relatedknowledge mitigates the effect of factors that may hinder performance in terms of identifying
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relevant information for use in decision-making. The current study investigates whether manage-ment accounting experience overcomes the effect of opportunity cost vagueness and projectcompletion stage in relation to identifying opportunity costs as relevant information for use inresource allocation judgment and decision-making. Further, it investigates whether this increasedattention to opportunity costs has a decisional impact in terms of influencing the likelihood ofcontinuing an in-progress project.
Explicit versus Implicit Opportunity CostsAlthough opportunity costs are not included in the calculation of accounting profits, oppor-
tunity costs are an intrinsic component of economic profits. Early research by Becker et al. �1974�found that despite the economic significance of opportunity costs, decision-makers placed moreweight on outlay costs as a decision input than on opportunity costs. Subsequent studies found thatindividuals attended to a single opportunity cost in a decision analysis only if it was presented inan explicit manner or spelled out to them as an opportunity cost rather than in an implicit manner�Becker et al. 1974; Neumann and Friedman 1978; Friedman and Neumann 1980; Hoskin 1983;Northcraft and Neale 1986�.
The key difference between an explicit and implicit opportunity cost is that the former ispresented in a more salient manner. For example, explicit opportunity costs in Becker et al. �1974�,Neumann and Friedman �1978�, and Friedman and Neumann �1980� were labeled “ForgoneProfit” and the actual amount was provided alongside the outlay cost information given to par-ticipants �e.g., variable overhead $161,648, forgone profit $69,548�. Implicit opportunity costswere not specifically labeled as a forgone profit, but rather the actual amount was provided in afootnote below the outlay cost information �e.g., obsolete materials can be sold on the market, ifnot used in the project for $69,548�. Hoskin �1983� and Northcraft and Neale �1986� used a similarpresentation such that explicit opportunity costs were clearly labeled and more salient whileimplicit opportunity costs were not clearly labeled and more peripheral.
Opportunity Cost VaguenessEarly studies which investigated the impact of implicit versus explicit opportunity costs were
successful at identifying whether individuals who lack management accounting experience attendto opportunity costs if they were blatantly labeled as an opportunity cost. However, the studiesfailed to incorporate a key characteristic of opportunity costs in the real world, the lack ofprecision associated with a future dollar amount due to uncertainty. From a decisional standpointan opportunity cost is often measured by looking ahead and is likely to be uncertain in amount.For example, the cost savings that are forgone if a piece of equipment used in production is notreplaced is an estimated amount plus or minus an estimated range. The actual costing savings arenot determinable until it is installed and are likely to depend on a variety of factors such as easeof use, employee productivity, and production volume.
Although there is a lack of consensus with respect to a single operational definition ofvagueness,1 commonly cited definitions refer to vagueness as the result of missing information orlack of knowledge, which leads to uncertainty regarding a particular outcome �see Einhorn and
1 Although prior judgment and decision literature used vagueness and ambiguity interchangeably, in theory they aredefinitively different. The two can be distinguished by using the argument made in Budescu et al. �1988�. Ambiguitymeans that a statement or event can be interpreted in two or more different yet precise ways. An ambiguous statementmight consist of asking an individual to select a “light” ball from an urn of black cork-filled balls and white lead-filledballs in which the probability of selecting a light ball is 80 percent. A vague statement or amount is one that is notclearly identified or cannot be understood precisely or exactly. The word vague is synonymous with imprecise, inaccu-rate, inexact, etc. Vagueness is the result of not knowing the probability distribution of an outcome �e.g., drawing a ball
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Hogarth 1985; Frisch and Baron 1988; Curley and Yates 1985�. Vagueness can be a commonpitfall of real world situations because decision-makers do not have access to exact informationabout the costs and benefits of all available options. Instead, decision-makers must rely on inexactinformation. Prior research has not investigated whether opportunity cost vagueness reducesdecision-makers’ tendency to attend to this relevant information.
Individuals have been shown to react to vagueness by avoiding vague situations. Ellsberg�1961� established the well-known Ellsberg Paradox by demonstrating that given the choice be-tween a vague and precise gamble, most individuals prefer the precise option. This vaguenessaversion has been found to persist in a variety of contexts �see Camerer and Weber 1992�. Varioustheoretical explanations regarding aversion to vagueness exist including self-evaluation �Hammand Bursztajn 1979; Roberts 1963�, evaluation by others �Ellsberg 1963; Gardenfors 1979; Todaand Shuford 1965�, and uncertainty avoidance �Curley et al. 1986�. These explanations do notmake any predictions regarding the effect of decision-maker characteristics �e.g., experience� onthe tendency to avoid vagueness.
Of interest to my study is the competence hypothesis which uses a decision-maker attribute,namely the feeling of competence, to explain aversion to vagueness. The competence hypothesisstates that the willingness to bet on an uncertain event is a function of both the precision of alikelihood estimate and one’s general skill, knowledge, or understanding of the relevant context.Heath and Tversky �1991� found that in their area of competence or knowledge, individualsshowed a preference to bet on their vague beliefs versus a lottery with a probability equal to theirstated confidence. In a more recent study, Goodie �2003� found that the willingness to bet versusnot bet at all sharply increased when the bet was related to participants’ area of competence orknowledge.
Based on these findings, it is likely that aversion to vague information is dependent onindividuals’ experience and related knowledge which will influence the feeling of competence ina particular decision-making setting. Specifically, an insignificant amount of prior domain-specificexperience and absence of a related knowledge base are likely to lead to the feeling of incompe-tence and in turn heighten the presence of vagueness. Inexperienced participants in a particulardomain typically focus on the more superficial aspects of a problem �Chi et al. 1981; Gagne et al.1993; Van De Wiel et al. 2000� instead of focusing on the relevant information that is necessary tosolve the problem. For example, when solving a problem, novice physicists who lacked proceduralknowledge focused on unimportant details �Wenk et al. 1997�. In a resource allocation decision,inexperienced individuals might focus on the vagueness of the available alternatives and willoverlook the underlying importance of the alternatives to the decision being made. In fact, VanDijk and Zeelenberg �2003� found that student decision-makers discounted vague information bytreating it as insufficient or nonexistent when making resource allocation decisions.
Management Accounting ExperienceFriedman and Neumann �1980� was the first study to investigate if decision-maker experience
influences integration of opportunity costs in decision-making. This study found that both mastersof business administration �M.B.A.� students and Certified Public Accountants �CPAs� showed atendency to rely on a single opportunity cost if it was available at zero cost, meaning that they didnot have to pay to obtain the information. If no information concerning an opportunity cost was
from an urn with an unidentified composition�, or when the outcome of an event is not known �e.g., may win between$200 and $400 if a green ball is drawn�. The former refers to probabilistic vagueness and the later to outcomevagueness.
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present, participants did not consider the possibility of a forgone prospect and try to estimate anamount. No demographic information was given regarding work experience of the participants inthe study.
Vera-Muñoz �1998� built on Friedman and Neumann �1980� and tested whether decision-maker knowledge and context �personal versus business� were influential on the inclusion ofopportunity costs in decision-making. Consistent with expectations, she found that individualswith high levels of general accounting knowledge, represented by masters of accounting students,focused on historical costs since this is the primary focus of Generally Accepted AccountingPrinciples �GAAP�. This GAAP knowledge base interfered with individuals’ ability to attend toopportunity costs in a business context. Thus, individuals with high GAAP knowledge actuallyattended to fewer opportunity costs than individuals with low GAAP knowledge represented byM.B.A. students.
Extending Vera-Muñoz �1998�, Vera-Muñoz et al. �2001� investigated the role of decision-maker experience and choice of analysis format �cash flow versus earnings� on the tendency tointegrate opportunity costs. She found that participants with more management accounting expe-rience integrated more opportunity costs only if they chose a cash flow-based format rather thanchoosing an earnings-based format. Notably, public accounting experience did not facilitate inte-gration of opportunity costs. These results were attributed to management accountants’ moreextensive domain-specific experience, which often consists of engaging in forward-lookingdecision-making tasks such as financial planning, budgeting, and forecasting. This domain expe-rience led to the development of procedural knowledge, which facilitated the choice of an appro-priate problem representation and attention to opportunity costs.
Lending further credence that management accounting experience and related proceduralknowledge will enable identification of opportunity costs, Bedard and Chi �1993� found thatexperienced individuals are better able to differentiate between information that is relevant andirrelevant. This is because experienced individuals exhibit a top-down approach to informationacquisition using rules of thumb and structured mental checklists. This relevant information mightinclude future-oriented outlay costs, cash inflows, expected returns, and opportunity costs. Con-sistent with these expectations, analysts performing a financial analysis task in Biggs �1984�demonstrated a highly structured search for information. Davis �1996� found that particular situ-ational experience improved auditors’ ability to select relevant information for making efficient,appropriate, control risk assessments.
Given little or no experience, decision-makers will ignore vague opportunity costs due to apropensity to focus on the vagueness of information. Management accounting experience is ex-pected to mitigate the effect of opportunity cost vagueness. First, management accounting expe-rience will enable development of a knowledge structure that facilitates identification of opportu-nity costs as relevant information regardless if the opportunity costs are precise or vague. Second,this experience and related knowledge will overcome the feeling of incompetence that is presentwhen individuals have little or no experience, which in turn will decrease the effect of opportunitycost vagueness. This suggests that decision-makers will attend to fewer opportunity costs whenpresented in a vague manner, and this effect is mitigated by management accounting experience.
H1a: Decision-makers will attend to fewer opportunity costs when they are presented in avague rather than precise manner.
H1b: Management accounting experience decreases the effect of vagueness on attention toopportunity costs.
Project Completion StageEscalation of commitment is defined as a situation where a decision-maker commits addi-
tional resources to a losing course of action because of prior investment �Staw 1976; Staw and Fox
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1977; Staw and Ross 1978�. A common explanation for escalation of commitment is the comple-tion effect, which predicts that decision-makers continue to invest in a failing project as they drawclose to project completion. Several studies �Conlon and Garland 1993; Boehne and Paese 2000;Moon 2001� have supported this contention by finding that decision-makers are more likely tocontinue a project that is nearly complete �e.g., 90 percent complete� versus far from complete�e.g., 10 percent complete�.
Based on the aforementioned studies it is clear that project completion stage influences thedecision to continue or discontinue a project, yet it is unknown whether project completion stageinfluences the search for information to be used in the decision-making process. Specifically, mystudy investigates how project completion stage influences the tendency to attend to relevantopportunity cost information. The tendency to ignore relevant opportunity cost information maybe useful in explaining resource allocation judgment and decision-making �e.g., how it attributesto escalation of commitment�. When evaluating an in-progress project, the stage of projectcompletion is an irrelevant cue and all costs and benefits associated with continuing and discon-tinuing the project should be considered regardless of proximity to completion.
There is considerable evidence that irrelevant cues inappropriately influence the decision-making of both inexperienced and experienced individuals. A literature review by Gaeth andShanteau �1984� identified several studies documenting the effects of irrelevant information onjudgments. For example, irrelevant information influenced evaluations by school administrators�Rice 1975�, soil classification judges �Gaeth and Shanteau 1984�, and human resource officers�Nagy 1981; Haefner 1977�. Findings from these studies suggest that decision-makers may havedifficultly ignoring information which is irrelevant for the task at hand. Findings from research onfinancial decision-making have also found that inexperienced decision-makers tend to search forconfirmatory information �Anderson 1988; Bouwman et al. 1987�. To the contrary, experiencedfinancial professionals tend to acquire information by searching for contradictory information�Anderson 1988; Bouwman et al. 1987�.
Management Accounting ExperienceFindings from prior research indicate that even experienced decision-makers are influenced by
irrelevant cues; domain-specific management accounting experience should mitigate the effect ofa nearly complete project on the tendency to ignore opportunity costs. As previously stated,management accountants are often required to perform analyses �e.g., capital project analyses�which require identification of relevant cash inflows and outflows such as increases in revenue,maintenance costs, and the salvage value of project-specific assets �Roehl-Anderson and Bragg2005�. Practice performing these tasks will likely lead to development of procedural knowledgeand facilitate identification of opportunity costs as relevant information.
Not only will prior practice and development of a related knowledge base facilitate identifi-cation of opportunity costs as relevant information in general, it will lead to problem-solvingstrategies which successfully identify opportunity costs regardless of the irrelevant cue of projectcompletion stage. First, consistent with finance professionals in Biggs �1984�, experienceddecision-makers are likely to exhibit a well structured manner of identifying relevant information.Second, this structured search for information is likely to include use of a mental checklist �Bedardand Chi 1993; Bouwman et al. 1987�. Third, when faced with a problem the reasoning process ofexperienced decision-makers tends to be automated and thus they are less likely to get hung up onsurface features of a problem �Shiffrin and Schneider 1977; Shanteau 1992�. Overall, a structuredsearch for information, use of a mental checklist, and automated reasoning are tools developedthrough experience which will enable decision-makers to identify opportunity costs regardless ofa project’s proximity to completion.
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Based on the preceding discussion, the presence of a nearly complete project is likely todecrease attention to opportunity costs in the face of an insignificant amount of managementaccounting experience. This is because decision-makers who lack experience are likely to get hungup on surface features such as a project’s nearness to completion and tend to focus on confirmingrather than disconfirming information. The experience gained in the domain of management ac-counting is likely to mitigate the effect of project completion stage on decision-makers’ tendencyto attend to opportunity costs. This suggests decision-makers will attend to fewer opportunity costswhen project completion stage is high and this effect is mitigated by management accountingexperience.
H2a: Decision-makers will attend to fewer opportunity costs when project completion stageis high rather than low.
H2b: Management accounting experience decreases the effect of project completion stage onattention to opportunity costs.
Attention to Opportunity Costs and Project ContinuanceIdentification of opportunity costs as relevant information is important because inclusion in an
analysis is likely to influence judgments and decisions. Specifically, it is important to attend toopportunity costs because failing to include them as relevant information is likely to bias in favorof continuing projects that are unprofitable. Prior research has yet to investigate the cognitiveprocess by which attention to opportunity costs influences judgment and decision-making andwhether it has a decisional consequence. If attending to opportunity costs does not impact judg-ment and decision-making, then the argument regarding the significance of attending to opportu-nity costs and including them in a decision analysis has little or no merit.
It is a logical argument that attention to opportunity costs will influence judgment anddecision-making since it should bring other available prospects to the attention of the decision-maker. Underlying this argument is the key importance of the opportunity cost concept such thatit forces decision-makers to consider all alternatives, and it is only by assessing opportunity coststhat a decision-maker is able to determine the true cost of any course of action �Ezzamel and Hart1987�.
By attending to opportunity costs, decision-makers will become aware of alternative coursesof action that will boost profitability and the tendency to continue an ongoing project will de-crease. As the number of opportunity costs identified in a decision analysis increases, the associ-ated cost of not taking the alternative course of action will increase. Individuals who do not attendto opportunity costs will not be receptive to the cost associated with forgoing the alternativecourse of action and in turn will remain focused on the ongoing project and favor continuance.
H3: Attention to opportunity costs decreases the likelihood of continuing a project.
Both opportunity cost vagueness and project completion stage are predicted to influenceattention to opportunity costs. Due to bringing decision-makers’ attention to alternative prospects,attention to opportunity costs is predicted to reduce the tendency to continue a project. Thissuggests that attention to opportunity costs mediates the causal sequence between the independentvariables, opportunity cost vagueness and project completion stage, and the dependent variable,likelihood of continuing a project �Robins and Greenland 1992�.
Based on the causal model, attention to opportunity costs is expected to mediate opportunitycost vagueness and project continuance, and attention to opportunity costs is expected to mediateproject completion stage and project continuance �See Figure 1�.
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EXPERIMENT AND METHODOLOGYParticipants and Administration of Experiment
To examine how management accounting experience influences attention to opportunity costs,two groups of participants were used in the study’s experiment. The first group consists of pro-fessionals who were recruited based on their membership in the Institute of Management Accoun-tants �IMA�. The domain of management accounting is unlike the auditing domain because it isnot possible to identify a task that individuals at a particular rank regularly perform �e.g., an auditsenior performing an internal control evaluation�. Due to this characteristic of the managementaccounting domain, members of the IMA were identified as a group of professional participantswho are expected to have practice performing forward-looking resource allocation-based taskssuch as forecasting or capital budgeting.
As summarized in Table 1, professional participants reported having an average of 3.7 yearsof public accounting experience, 8.6 years of management accounting experience, and 7.6 years ofgeneral resource allocation experience. Table 1 also reports experience in years with respect tospecific tasks that are commonly performed by management accountants. Fifty �51 percent� of theexperienced participants were CPAs and 63 �64 percent� were Certified Management Accountants�CMAs�.
One hundred four IMA members attending IMA-sponsored events participated in the study.Five participants’ responses were not usable as they were incomplete. Eighty-six usable responseswere obtained via onsite administration by the researcher at one regional conference, two monthlychapter meetings, and one continuing professional education session. Participants were not givenany time constraints. The remaining responses were not obtained via onsite administration becausethere was not enough time available at a monthly IMA chapter meeting to formally conduct the
FIGURE 1Theoretical Model
Opportunity CostVagueness (X1)
Project CompletionStage (X2)
(+) a
Number ofOpportunity Costs (M)
ProjectContinuance (Y)
H1a (-)
H2a (-)
Management AccountingExperience (W)
H1b (+)
H2b (+)
H3 (-)
a This path was not part of the study’s hypotheses; however, it was established in prior research (see Vera-Muñoz et al. 2001). Its inclusion ensures the completion of the model and the associated causal sequence.
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experiment.2 Thirty packets were handed out by the chapter’s president containing the experimen-tal instrument and envelopes addressed to the researcher. Of the 30 packets, 13 usable responseswere received for a response rate of 43 percent. On average, this group completed the case in 44minutes.
The second group of participants consists of 116 students recruited from a large state univer-sity who were expected to have little or no management accounting experience. As expected, theseparticipants reported minimal amounts of professional experience �see Table 1 for detailed statis-tics�. This group included upper-level accounting major students enrolled in a cost accountingcourse that had completed several economics and accounting courses. This coursework was ex-pected to provide them with the declarative knowledge necessary to perform the experimentaltask. The case was administered during regular class time and they were given extra credit forparticipation. This group was also not given any time constraints and on average completed thecase in 57 minutes.
Case MaterialsThe study’s experiment consisted of a single case-based scenario in which a regional grocery
store �Fresh Foods, Inc.� was developing an internal logistics project. Participants were asked toassume the role of the company’s recently appointed Internal Investment Project Supervisor andperform a cash flow analysis to determine whether the logistics project should be continued ordiscontinued. The recently appointed verbiage was used to avoid creation of a sponsorship biastoward the logistics project �see Chenhall and Morris 1991�. Sample case materials are provided inthe Appendix. As described in Table 2, the experiment had two phases: an experimental phase�Phase I� and a post-experimental phase �Phase II�.
2 There was no significant difference between the dependent variables of the participants who completed the task onsiteversus on their own time �number of opportunity costs attended to, t � 0.65, p � 0.72, two-tailed; continuancejudgment, t � 0.46, p � 0.65, two-tailed; continuance decision, t � 0.41, p � 0.72, two-tailed�.
TABLE 1
Participant Experience(in years)
Professional(n � 99)
Non-Professional(n � 116)
Mean(SD) Range
Mean(SD) Range
Public Accounting 3.7�5.0�
�0–27.0� 0.02�0.07�
�0–1.0�
Management Accounting 8.6�8.1�
�0–31.0� 0.01�0.02�
�0–2.0�
Resource Allocation 7.6�6.8�
�0–31.0� NoneReported
None Reported
Capital Budgeting 6.3�6.5�
�0–30.0� NoneReported
None Reported
Analysis of Capital Projects 4.0�5.6�
�0–29.5� NoneReported
None Reported
Project Management 5.3�6.4�
�0–2.0� 0.01�0.14�
�0–1.5�
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Independent VariablesThere are two independent variables, opportunity cost vagueness and project completion
stage, which were manipulated between subjects in all cells. Vagueness of opportunity costs waspresented at two levels �precise and vague� and included both probabilistic and outcomevagueness.3 Probabilistically vague opportunity costs were presented as having a likelihood ofoccurrence �e.g., there is an 85 percent to 90 percent chance that fixed assets will be resold for$170,000�. Outcome vague opportunity costs were presented as an interval �e.g., annual return onmarketable securities will be 8 percent � 4 percent�. Both types of vagueness were included forcompleteness purposes as prior research has identified them as equally important �Ho et al. 2001,2002; Kuhn and Budescu 1996�.
Project completion stage was manipulated at two levels using a percentage �low as 10 percentcomplete and high as 90 percent complete�. This is consistent with previous completion effectstudies �see Conlon and Garland 1993; Garland and Conlon 1998; Boehne and Paese 2000�.
Moderating VariableSince management accounting experience is expected to reduce the effect of opportunity cost
vagueness and project completion stage, it is included in the causal model as a moderating
3 Opportunity costs that exhibited outcome vagueness and probabilistic vagueness were attended to by 62 percent and59.5 percent of the study’s participants, respectively. The difference was not statistically significant �t � 0.81, p � 0.42,two-tailed�, suggesting that there was no difference in the tendency to attend to opportunity costs that are probabilisticor outcome vague. This is consistent with related research that has found individuals respond similarly to both types ofvagueness �Ho et al. 2001, 2002; Kuhn and Budescu 1996�.
TABLE 2
Overview of Experimental Phases
Phase I: ExperimentalItem Description
Instructions �pp. 1–2� Details about assumed role, task, company, and table ofcontents.
Background Information �p. 3� Description of company, logistics project, and resourceallocation request.
Internal Memorandum �p. 4� Request from company’s CEO to make a continuance decision.Summary Report �pp. 5–6� Financial and nonfinancial information about project funding,
current progress, additional outlay, third party logistics costs,and in-house logistics costs.
Participant Responses �pp. 7–8� Asked to perform cash flow analysis, continuation judgmentand decision, and summary of any nonfinancial factorsconsidered.
Phase II: Post-ExperimentalItem Description
Manipulation Check �p. 1� Indicate project completion condition.Background Questionnaire �pp. 1–2� Demographic, academic, work experience, difficulty, and
realism questions.Multiple Choice Questions �pp. 3–8� Opportunity cost knowledge and analytical ability questions.a
a Questions were used to obtain a measure of participants’ analytical ability and knowledge of the opportunity costconcept for use as control variables in the causal model.
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variable. Management accounting experience is operationalized using years of experience reportedby both participant groups, students and IMA members, who reported varying amounts of man-agement accounting experience.
Mediating VariableNumber of opportunity costs attended to in participants’ cash flow analyses is expected to act
as a mediator between the independent variables �opportunity cost vagueness and project comple-tion stage� and the dependent variable �project continuance�. The number of opportunity costsvaries from zero to six. The six opportunity costs which were incurred if the logistics project wascontinued include: �1� profit from the initiation of an internal product line, �2� return on market-able securities, �3� disposal proceeds from semi-trucks, �4� sublease revenue on warehouse, �5�staffing revenue from manager, and �6� cost of goods sold savings due to implementation of aJust-in-Time inventory system.
Participants were given two separate sheets of paper labeled “continue” and “discontinue”with a blank line at the bottom of each page labeled total cash outflow �inflow�. This was providedin order to facilitate the organization of their cash flow analyses. An opportunity cost was consid-ered “attended to” if it was included in participants’ calculations for the analysis regarding whetherthe logistics division should be continued or discontinued. For example, if the resale value of thetrucks appeared as an item in the total cash flows associated with continuing the project, it wascounted as one opportunity cost.
The number of opportunity costs attended to in participants’ analyses was identified by twoindependent coders who were blind to the experimental conditions. Coders were given both piecesof paper for each participant which were labeled “continue” and “discontinue” as discussed above.As well, they were compensated and walked through a practice case to ensure they were familiarwith the mechanics of their assigned task. The coders agreed 94.5 percent of the time and inter-rater reliability was assessed with the Kappa Coefficient �Kappa � 0.927, p � 0.01�. Discrepan-cies were resolved via discussion between the two coders and were the result of a coder overlook-ing an opportunity cost and thus not including it in their count for a participant.
Dependent VariableThe dependent variable is participant’s likelihood judgment concerning continuance of the
project.4 After the participants performed their analyses regarding continuance or discontinuanceof the logistics division project, they were asked to make a judgment and decision about continu-ing the project. For the project continuance judgment, participants were asked to place an X on thenumber of an 11-point scale that best represents the likelihood they would continue the logisticsproject with endpoints labeled extremely unlikely and extremely likely. As well, participants wereasked to mark an X next to their favored course of action in terms of continuing or discontinuingthe project.
Control VariablesData were also collected on five control variables that could affect participants’ performance
on the study’s experimental task. The first four control variables—analytical ability, knowledge ofthe opportunity cost concept, perceived realism of the task, and perceived difficulty of the task—were included based on arguments made in prior studies that the variables may affect attention toopportunity costs �see Vera-Muñoz 1998; Vera-Muñoz et al. 2001�. The first control was analytical
4 The causal model was also run with project continuance measured as a dichotomous variable with continue � 1 anddiscontinue � 0. The results of the model were similar to those with project continuance measured on an 11-point scale.
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ability and was measured using eight questions from prior Graduate Record Exams �GRE�. Thesecond control, knowledge of the opportunity cost concept, was also measured using eightmultiple-choice questions which were designed to assess participants’ knowledge of the concept.The third and fourth controls are participants’ perceived difficulty and realism of the task, whichwere measured on 11-point Likert scales.
The fifth control, participants’ age, was included to control differences among the participantsdue to maturity, social class �money made�, and the number of decisions made inside and outsideof the workplace, and how these differences may affect attention to opportunity costs and projectcontinuance. Age was used since each of these factors in general is likely to vary directly with age.
RESULTSManipulation Check
To ensure participants were aware of the percent complete manipulation, they were asked toindicate whether the logistics project was 10 percent or 90 percent complete in the post-experimental questionnaire. All of the participants correctly identified their experimental conditionsuggesting that the project completion manipulation was successful. A manipulation check was notincluded for opportunity cost vagueness because of an inability to elicit participants’ awareness ofthe vague presentation of the six opportunity costs using a manipulation check-related question.Furthermore, as hypothesized, inexperienced participants were expected to ignore vague opportu-nity costs due to the imprecision of the information. Thus, if asked they would not be aware if theyattended to the vagueness of the information.
Descriptive Statistics
Mediating VariableDescriptive statistics regarding the mediating variable, number of opportunity costs attended
to by experimental condition, are reported in Table 3. Participants are classified by range ofexperience in years and for participants as a whole. The mean number of opportunity costsattended to by participants was 3.87 �� � 2.20�.
Dependent VariableDescriptive statistics for the dependent variable, project continuance judgments, are reported
in Table 4 for participants classified by range of experience in years and for participants as awhole. The mean project continuance judgment is 4.86 out of 11 �� � 2.16�.
Statistical ModelThe study’s model is estimated with structural equation modeling �SEM� using maximum
likelihood estimation via AMOS software. This method is used in addition to the Sobel Test �Sobel1982� and as an alternative to the traditional Baron and Kenny �1986� method via regressionanalysis because it is more superior in terms of controlling measurement error �Holmbeck 1997;Hoyle and Kenny 1999; Kline 1998�. As well, it enables an alternative way to explore the medi-ated effect in terms of bootstrapping �Preacher and Hayes 2004; Kline 1998; Hoyle and Kenny1999�. Bootstrapping is a nonparametric method that can be used to test hypotheses. It does notassume normality �Efron and Tibshirani 1993; Mooney and Duval 1993� and allows for a morepowerful test �Preacher and Hayes 2004�.
Model FitModel fit is assessed for the tested model using common fit indices including the Chi-square
��2� test statistic, Comparative Fit Index �CFI�, and the Root Mean Square Error of Approximation
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�RMSEA�. The model had a good fit to the data ��2 = 0.90, p � 0.64; CMINdf � 0.41; CFI �0.98; RMSEA � 0.02�. A conclusion of good fit is derived on the basis that the �2 statistic isinsignificant �Joreskog 1969�, the CMINdf ratio is less than 5 �Wheaton et al. 1977�, the CFI isgreater than 0.95 �Hu and Bentler 1999�, and the RMSEA is less than 0.06 �Hu and Bentler 1999;Kaplan 2000�. Results are presented graphically in Figure 2.
TABLE 3
Descriptive Statistics: Mediating VariableMean Number of Opportunity Costs Attended Toa
Panel A: Range of Experience (Years) and Opportunity Cost VaguenessRange of Experience Precise Vague Total
0 to 1 year 3.48�2.17�
n � 57
1.87�1.90�
n � 64
2.68�2.01�
n � 1211 to 5 years 5.20
�1.30�n � 15
4.91�1.51�
n � 18
4.88�1.41�
n � 335 to 10 years 4.95
�0.80�n � 12
5.27�1.01�
n � 15
5.04�0.91�
n � 2710 to 15 years 4.50
�1.11�n � 6
5.33�0.82�n � 7
4.92�0.58�
n � 13� 15 years 5.10
�0.88�n � 9
5.45�0.69�
n � 12
5.29�0.78�
n � 21Total 3.94
�1.99�n � 99
3.07�2.30�
n � 116
3.87�2.39�
n � 215
Panel B: Range of Experience (Years) and Project Completion StageRange of Experience 10% 90% Total
0 to 1 year 3.42�2.15�
n � 63
1.97�1.99�
n � 58
2.68�2.01�
n � 1211 to 5 years 5.25
�1.16�n � 15
4.75�1.67�
n � 18
4.88�1.41�
n � 335 to 10 years 4.80
�0.92�n � 13
5.21�0.89�
n � 14
5.04�0.91�
n � 2710 to 15 years 5.23
�0.70�n � 5
4.53�1.37�n � 8
4.92�0.58�
n � 13� 15 years 5.58
�0.51�n � 9
4.89�0.93�
n � 12
5.29�0.78�
n � 21Total 4.13
�1.96�n � 105
2.96�2.23�
n � 110
3.87�2.39�
n � 215
Standard deviation in parentheses.a Mean number of opportunity costs participants attended to when performing project continuance cash flow analysis
�minimum possible is zero and maximum is six�.
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Control VariablesAn analysis of the control variables indicates that analytical ability, knowledge of the oppor-
tunity cost concept, and perceived realism of the task are not associated with attention to oppor-tunity costs in the causal model �see Table 5, Panel B�. Perceived difficulty of the task is nega-
TABLE 4
Descriptive Statistics: Dependent VariableProject Continuance Judgmenta
Panel A: Range of Experience (Years) and Opportunity Cost VaguenessRange of Experience Precise Vague Total
0 to 1 year 5.00�2.68�
n � 57
5.92�2.73�
n � 64
5.46�2.73�
n � 1211 to 5 years 3.80
�1.92�n � 15
3.64�2.50�
n � 18
4.34�2.27�
n � 335 to 10 years 4.40
�2.29�n � 12
3.73�2.15�
n � 15
3.85�1.85�
n � 2710 to 15 years 3.70
�2.89�n � 6
4.33�1.51�n � 7
4.09�3.51�
n � 13� 15 years 3.69
�1.26�n � 9
3.09�1.64�
n � 12
3.38�1.47�
n � 21Total 4.61
�2.47�n � 99
5.10�2.72�
n � 116 n � 215
Panel B: Range of Experience (Years) and Project Completion StageRange of Experience 10 Percent 90 Percent Total
0 to 1 year 5.34�2.74�
n � 63
5.57�2.73�
n � 58
5.46�2.73�
n � 1211 to 5 years 3.63
�2.56�n � 15
3.75�2.12�
n � 18
4.34�2.27�
n � 335 to 10 years 4.00
�2.05�n � 13
3.76�1.76�
n � 14
3.85�1.85�
n � 2710 to 15 years 4.60
�2.23�n � 5
3.50�2.07�n � 8
4.09�3.51�
n � 13� 15 years 3.17
�1.64�n � 9
3.66�1.23�
n � 12
3.38�1.47�
n � 21Total 5.13
�2.56�n � 105
4.93�2.59�
n � 110 n � 215
Standard deviation in parentheses.a Mean project continuance judgment made on an 11-point scale.
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tively associated with attention to opportunity costs �� � �0.19, p � 0.01�. Age is positivelyassociated with attention to opportunity costs �� � 0.35, p � 0.01� and negatively associated withproject continuance �� � �0.14, p � 0.05�.
Hypothesis 1aHypothesis 1a predicts that fewer opportunity costs will be attended to when presented in a
vague manner rather than a precise manner. The negative path loading �� � �0.24, p � 0.01�between opportunity cost vagueness and the number of opportunity costs attended to providessupport for H1a. See Figure 2 for the tested model and Table 5 Panel A for detailed statistics.
Hypothesis 1bHypothesis 1b predicts that management accounting experience mitigates the effect of vague-
ness on the tendency to attend to opportunity costs and thus acts as a moderator. To test formoderation, the significance of the path from the interaction between management accountingexperience �in years� and opportunity cost vagueness to the number of opportunity costs attendedto was examined �Hopwood 2007�. The significant path �� � 0.23, p � 0.01� between theinteraction term �vagueness management accounting experience� and number of opportunitycosts attended to suggests that management accounting experience moderates the effect of oppor-tunity cost vagueness, which supports H1b.
FIGURE 2Tested Model
Opportunity CostVagueness (X1)
Percent Complete (X2)
(0.16*)a
Number ofOpportunity Costs (M)
ProjectContinuance (Y)
H1a (-0.24**)
H2a (-0.29**)
(H3 -0.18*)
Management AccountingExperience (W)
H1b (0.23**)
H2b (0.12**)
(0.06)
(0.03)
*, ** Indicate p < 0.05 and p < 0.01, respectively.a The model was also run with project continuance measured as a dichotomous variable, with continuance = 1
and discontinue = 0. The results of the model were similar to those with the 11-point dependent variable.b Results indicate that number of opportunity costs mediated the relationship between project vagueness and
project continuance, and project completion stage and project continuance.Note: Dashed lines are used to represent the mediational relationship between X, M, and Y.
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Hypothesis 2aHypothesis 2a predicts that fewer opportunity costs will be attended to when project comple-
tion stage is high rather than low. The negative path loading �� � �0.29, p � 0.01� betweenproject completion stage and the number of opportunity costs attended to provides support forH2a.
Hypothesis 2bHypothesis 2b predicts that management accounting experience mitigates the effect of project
completion stage on the tendency to attend to opportunity costs and thus acts as a moderator. In
TABLE 5
Standardized Path Estimates and 95 Percent Confidence Intervals (CI) for ModelsPredicting Project Continuance with Number of Opportunity Costs as a Mediator
Panel A: Main Variables
Model Paths(�)
Estimatea HypothesisPredicted
Sign
MA Experience → OpportunityCosts
0.16* — —
Vagueness → OpportunityCosts
�0.24** H1a ���
�Vagueness MA Experience�→ Opportunity Costs
0.23** H1b ��
Percent Complete →Opportunity Costs
�0.29** H2a ���
�Percent Complete MAExperience� → OpportunityCosts
0.12* H2b ��
Opportunity Costs → ProjectContinuance
�0.18* H3 ���
Vagueness → ProjectContinuance
0.06 — —
Percent Complete → ProjectContinuance
0.03 — —
Panel B: Control VariablesModel Paths (ControlVariables)
(�)Estimatea Hypothesis
PredictedSign
Analytical Ability →Opportunity Costs
0.01 — —
Knowledge of OpportunityCost Concept →Opportunity Costs
0.07 — —
Perceived Difficulty of Task →Opportunity Costs
�0.19** — —
Perceived Realism of Task →Opportunity Costs
�0.04 — —
Age → Opportunity Costs 0.35** — —Age → Project Continuance �0.14* — —
*, ** p � 0.05, and p � 0.01, respectively.a Bootstrapped confidence intervals are used as an additional means of testing the significance of the maximum likelihood
path estimates. All significance per the confidence intervals is consistent except for Age → Project Continuance. Thissuggests the path is not significant.
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testing for moderation, the path from the interaction term between management accounting expe-rience �in years� and project completion stage to the number of opportunity costs attended to wasexamined for significance �Hopwood 2007�. The significant path �� � 0.12, p � 0.05� betweenthe interaction term �project completion management accounting experience� and number ofopportunity costs attended to suggests that management accounting experience moderates theeffect of opportunity cost vagueness, which supports H2b.
Hypothesis 3Hypothesis 3 predicts that attention to opportunity costs decreases the likelihood of continu-
ing an ongoing project. This prediction is supported as indicated by the negative and significantpath coefficient �� � �0.18, p � 0.05� between number of opportunity costs attended to andproject continuance.
Tests for MediationSince attention to opportunity costs is expected to act as a mediator between each independent
variable �vagueness and project completion stage� and the dependent variable �project continu-ance�, tests were conducted to determine whether no, partial, or full mediation was present usingprocedures outlined in Shrout and Bolger �2002�.5 The steps are similar to those outlined in Baronand Kenny �1986�; however, the use of path analysis provides bootstrapped confidence intervalsthat are used in addition to traditional tests of significance to provide more evidence regardinghypothesized relationships between variables. As well, the condition requiring a relationship be-tween the independent variable to the dependent variable is relaxed due to the possibility ofsuppression by a competing process �Kenny et al. 1998�. This argument has been supported byseveral researchers �see Preacher and Hayes 2004; Collins et al. 1998; MacKinnon 2000�.
The first condition, that X �opportunity cost vagueness� is related to Y �project continuance�,is not met. This is not a concern since it has been suggested that this condition be relaxed asdiscussed above. The second condition, that vagueness is related to the number of opportunitycosts �M�, is met �� � �0.24, p � 0.01�. The third condition, that attention to opportunity costsis related to project continuance when vagueness is included in the model, is also met �� � �0.18,p � 0.05�. The fourth condition, that vagueness is related to project continuance in the presence ofattention to opportunity costs, is not met �� � 0.06, p � 0.65�. The failure to meet the fourthcondition suggests that complete mediation is present; thus, there is no direct effect of vaguenesson project continuance after controlling for attention to opportunity costs. As well, the significanceof the Sobel Test �z � 2.50, p � 0.05�, which directly tests the presence of mediation by assessingwhether the effect of X on Y is significantly reduced upon the addition of a mediator to the model,suggests complete mediation is present �Preacher and Hayes 2004�.
Overall, these results suggest that the relationship between vagueness and project continuanceis completely mediated by attention to opportunity costs, and any effect of vagueness on projectcontinuance is indirect via attention to opportunity costs. This also suggests that participants areless likely to continue a project if more opportunity costs are attended to even after controlling foropportunity cost vagueness.
In testing whether the number of opportunity costs attended to acts as a mediator betweenproject completion stage and project continuance, the first condition of a significant relationshipbetween X �project completion stage� and Y �project continuance� was not met. Based on the
5 Since there was a presence of a moderator and a mediator, necessary procedures were performed to ensure thatmoderated mediation was not present. The condition of a significant interaction between the moderator �managementaccounting experience� and mediator �number of opportunity costs attended to� in the dependent variable equation wasnot met. This suggests the absence of moderated mediation �Preacher et al. 2007�.
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argument made by Kenny et al. �1998�, this condition was relaxed and the second condition wastested. The significant path loading from attention to opportunity costs to project completion stage�� � �0.29, p � 0.01� suggests the second condition is met. The third condition, that attention toopportunity costs is related to project continuance in the presence of project completion stage, isalso met �� � �0.18, p � 0.05�. The fourth condition, that project completion stage is related toproject continuance in the presence of attention to opportunity costs, is not met �� � 0.03, p �0.67�, indicating the presence of complete mediation. This finding indicates that there is no directeffect of project completion stage on project continuance after controlling for attention to oppor-tunity costs. Thus, attention to opportunity costs completely mediates the relationship betweenproject completion stage and project continuance. The significance of the Sobel Test �z � 3.27, p� 0.01� also indicates complete mediation is present.
Overall, this finding suggests that the relationship between project completion stage andproject continuance is completely mediated by attention to opportunity costs, and any effect ofcompletion stage on project continuance is indirect via attention to opportunity costs. This alsosuggests that attention to opportunity costs reduces the likelihood of continuing a project evenafter controlling for project completing stage.
SUMMARY AND CONCLUSIONSThis study demonstrates that opportunity cost vagueness and a nearly complete project exac-
erbate the tendency to discount opportunity costs in the absence of significant levels of manage-ment accounting experience. Results from the tested causal model demonstrate that managementaccounting experience mitigates the effect of these factors. This suggests that through on-the-jobexperience, management accountants have acquired the necessary procedural knowledge to searchfor and identify relevant opportunity cost information when making resource allocation decisions,even in the face of situational factors that may negate attention to opportunity costs.
The study also finds that attention to opportunity costs acts as a mediator between the twofactors of interest, opportunity cost vagueness and project completion stage, and the likelihood ofcontinuing an ongoing project. There was a negative relationship between attention to opportunitycosts and the tendency to continue an ongoing project, suggesting that attending to opportunitycosts highlights the cost of forgoing alternative courses of action. Thus, as indicated by themediated relationship, considering opportunity costs has an economic decision consequence.
The failure to include opportunity costs as relevant information can be costly since it maycause decision-makers to disregard information that may be suggestive of a more favorable courseof action. This in turn can lead professionals such as management accountants to recommend anunfavorable course of action to other business partners within the organization. Additionally,opportunity costs can be used by management accountants to highlight the overall benefit of arecommended decision.
This issue should not only be of interest to practicing management accountants but shouldalso be of interest to managerial accounting instructors. Lessons in the area of relevant informationfor decision-making often present students with opportunity cost information that is precise, whichis inconsistent with how the information would likely appear in an actual decision-making setting.Students are also rarely presented with situations in which they must overlook decision settingcharacteristics �e.g., nearly complete project� and focus on how the information provided can beused to make a particular decision. Instructors might consider more realistic case-based instructionwhich would provide students with practice on how to search for and process relevant informationfor decision-making.
This study is subject to at least two limitations. First, although the case materials weredeveloped to be as realistic as possible, the task and information presentation may differ from
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what decision-makers are faced with in the “real world.” For example, all relevant informationmight not be available in summarized form. Further, in order to obtain strong internal validity thecase was absent various qualitative factors �e.g., current economic conditions�.
A second limitation that is inherent to a study that compares the differential performance ofindividuals who vary on the basis of experience is that other external factors may be correlatedwith experience and may drive the results. Although I included several variables to control forthese factors, it is impossible to control for every factor and/or to develop a perfectly reliablecontrol. Beyond these limitations, the results of my study suggest that management accountingexperience enables the ability to integrate opportunity costs as relevant information despite avague presentation and a nearly complete project. As well, attention to opportunity costs does infact influence judgment and decision-making and thus is likely to have an economic consequence.
APPENDIXEXPERIMENTAL CASE
Fresh Foods, Inc., is a mid-sized grocery store chain with locations throughout the SoutheastUnited States. The company’s headquarters are located in Orlando, FL. Although they carrynonperishable foods, they are known for their large variety of organic and non-organic fresh fruit,vegetables, and healthy baked goods.
Fresh Foods has decided to implement an in-house logistics division which would completelyreplace their third-party distributor. The logistics division project was initiated by Mr. JamesLondon, Fresh Foods’ prior Internal Investment Project Supervisor. Unfortunately, Mr. Londonwas diagnosed with a serious illness and had to resign. After much careful consideration, theBoard of Directors has appointed you as Mr. London’s successor. Since the logistics divisionproject has not been given adequate attention in the last few weeks, it is imperative that youreview the progress of the project and ensure it will be beneficial to Fresh Foods.
Step 1: As Fresh Foods’ Internal Investment Project Supervisor you must perform a cashflow analysis regarding the logistics division project. If the project is continued, it will beallocated additional funds required for completion. Please carefully consider all of the previ-ous information presented to you when performing your analysis and when making yourjudgments and decisions. (Note: At this point, detailed information was provided to allow theparticipants to perform the cash flow analysis. The experimental manipulations as describedin the body of the paper were embedded in this detailed information section).
Step 2: Please provide answers to the following while referring to your cash flow analysis.
1. On the scale below please place a mark on the number that best represents thelikelihood that you would continue the in-house logistics project.
ExtremelyUnlikely
ExtremelyLikely
0 1 2 3 4 5 6 7 8 9 10Neutral
2. If you had to make an absolute decision you would decide to (Please mark an Xnext to your decision)._____ Discontinue logistics project. _____ Continue thelogistics project.
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