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Cost Accounting at the Service Level: An Analysis of Transaction Cost Influences on Indirect Cost Measurement in the Cost Accounting Plans of Large US Cities

PAQ, Vol. 41 No. 1, (2017)

Cost accounting has been used in public organizations for over 100 years. In spite of cost accounting’s history, there remains little empirical research of multiple organizations use of cost accounting at the department or service level. This paper uses the data from large U.S. cities’ central cost accounting plans, budgets, Comprehensive Annual Financial Reports, and common measures of transaction costs to examine the influence of economic transaction costs on the measurement of indirect cost measurement for services. The results indicate that indirect cost measurement is limited by the transaction costs that arise from asset specificity at the service level but measurement uncertainty is related with a higher likelihood of observing an indirect cost driver. Transaction cost theory may help explain the notable underutilization of cost accounting in public organizations, but it also highlights the need for understanding the different dimensions of transaction costs for cost accounting and performance measurement.

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