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The Chartered Institute of Management Accountants in the UK deﬁnes management accounting as an integral part of management concerned with identifying, generating, presenting, and interpreting information used for
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(a) formulating strategy,
(b) planning and controlling activities,
(c) decision taking,
(d) eﬃcient resource usage,
(e) performance improvement and value enhancement,
(f) corporate governance and internal control,
(g) safeguarding tangible and untangible assets.
While the discipline ﬁnds its roots in industrial accounting concerns and factory-based cost accounting, it has undergone an important transformation over the past twenty years. The ﬁeld presently continues to undergo signiﬁcant changes and remains in a dynamic state of ﬂux.
During the 1980s, many organizations in Western countries perceived a need to alter their management practices. A variety of factors were responsible for this. In part, at the international level, competitive manufacturing methods used by major Japanese corporations and by those of newly industrialized countries were seen as superior to those used in the west (Bhimani and Bromwich 1996). To an extent, this was ascribed to sociocultural characteristics of Japanese workers from factory-ﬂoor operators to senior executives. But what was viewed as more signiﬁcant was the application of ﬂexible manufacturing technologies by the Japanese to produce a greater diversity of high-quality, low-priced products more quickly. Speciﬁc modes of work organization, production systems and motivational incentives were seen to diﬀer radically from those used in the West. These forces of change on management approaches have also been viewed as having had important implications for management accounting practices.
The adoption of ﬂexible technologies in manufacturing and service-oriented enterprises, including manufacturing and enterprise resources planning systems, and features of computer-integrated manufacturing, led to conventional accounting methods for cost allocation being questioned. Whereas the manufacturing, environment had become more automated, more specialized, more ﬂexible, and requiring larger capital investments, methods of costing products continued to operate under the conventional notion that company operations were geared toward repetitive production of homogeneous products relying on labor-based activities. Management-accounting techniques were thus seen to be antagonistic to the realities of the new manufacturing environment. Similar critiques were being made of cost-accounting methods in service industries.
Other calls for change in management accounting were also being voiced. North American academics thought that from the post-First World War period, progress in management accounting had virtually ceased, principally as a result of the growing importance of the external reporting priorities, especially in the area of stock valuation over those of internal organizational accounting. Some critics of traditional management accounting asserted that management accounting had, for over seventy years, been subordinated to the requirements of ﬁnancial-statement preparation for external parties (Johnson and Kaplan 1987). Advocates of this school have supported calls for management-accounting reforms based on the argument that the ﬁeld must once again be allowed to develop in its own right, rather than remain subordinate to ﬁnancial accounting.
Many commentators made more substantive arguments, focusing on the propriety of accounting practices, given the roles that management accounting is intended to fulﬁll. The usefulness of complex methods of organizational costing and pricing, in the face of the belief that the price of a product must ultimately meet the expectations of the marketplace rather than those of its producers, have been questioned. Others have given weight to the argument that management accounting has for too long remained isolated and divorced from other enterprise functions. Conventional accounting practices have put into place channels for information ﬂow and routes for data exchange that have rendered some organizations static, inﬂexible, and excessively structured, especially in the case of ﬁrms operating in dynamic and fastchanging markets. Calls have thereby been made for cost-management tools appealing to wider rationales of enterprise management.
2. Onward with Change
During the 1990s, many organizations pursued a vigorous management change agenda. Until 1994, many organizations shied away from investing in novel enterprise management philosophies because of the malaise experienced in the worldwide economy. Nevertheless, cost-containment programs were widely implemented. Techniques such as activity based costing, throughput accounting, target cost management, life-cycle costing, and the greater use of non-ﬁnancial performance measures were seen as oﬀering the potential of enhancing value creation and aiding costcontainment (Bromwich and Bhimani 1994, Yoshikawa et al. 1993). From 1995, as the economic engine of major western economies began to generate more steam, organizational searches for wider reaching management technologies grew apace once more. Such pursuits were, however, tempered with a more cautious approach to large-expenditure projects on altering ways of managing. Moreover, accounting techniques for aiding managerial tasks appeared more cognizant of a need to interlink enterprises’ various value-creation activities. Thus, managementaccounting technologies stressed processes, as opposed to functions, and emphasized linkages between traditional activities, as well as more ﬂexible organizational structures.
Notions of the impact of brand management on cost accountings were highlighted. Attempts to link organizational learning to customer responsivity and ﬁnancial tracking were made via establishing novel performance-measure control approaches. Whereas traditional conceptions of cost-accounting techniques for scorekeeping purposes were shunned, achieving more balanced scores came to be deemed important (Kaplan and Norton 1996). Likewise, whereas ‘value added’ was a signiﬁcant though short-lived endeavor among proponents of more comprehensive ﬁnancial reporting in the 1970s, the pursuit of a trademarked notion of economic value added surfaced (Stern et al. 1995). Certainly, the need to be strategically perceptive in all things management accounting was widely perceived during the mid-1990s. The US-based Institute of Management Accountants changed the name of its ﬂagship magazine Management Accounting to Strategic Finance. Likewise, the Canadian Society of Management Accountants revamped its intellectual capital whereby its published products came to be grouped as a ‘strategic management series’ package. No doubt many organizations, in both Europe and North America, consider themselves as engaging and supporting strategic management-accounting activities while not appealing to any single deﬁnition of the term (Bhimani and Keshtvarz 1999, Guilding et al. 2000).
3. Strides in Management Accounting
Perhaps it is well to turn to some signiﬁcant technologies of management accounting the seeds of which were planted during the 1980s and germinated and ﬂowered in the 1990s. Two of these provide the focus presently.
3.1 Target Costing
Target costing indicates for each product (and each cost element of that product) the cost reductions (over time) that must be achieved by the ﬁrm and its suppliers in order to ensure that the company’s strategy is realized throughout the product’s life-cycle, while maintaining a competitive market price for the product oﬀered (Bromwich and Bhimani 1994).
A preliminary step in this process is for the enterprise to come to a view over the whole product lifecycle as to the product strategy in terms of the product attributes to be oﬀered relative to competitors, including further options, quality and after sales services, the technology to be used, the desired proﬁt, and market share. A comparison with expected prices in the market over the life cycle of the product determines the price at which the product with the planned characteristics can be oﬀered in the market and be expected to obtain their target proﬁt and market growth.
Target costing in some Japanese companies is seen as a cost-reduction exercise that seeks to achieve cost reduction in the preproduction stages. It seeks to force designers to reduce costs, though how far target prices should seek to include strategy, and how far it should be seen predominantly as a continuing cost reduction device is a ﬁrm-speciﬁc issue. Such an approach may be supplemented by levying extra costs on nonstandard parts and excessive tooling, as well as penalizing the use of nonstandard parts or new machines. The procedure contains a number of other lessons. One is that prices are determined in the market and reﬂect competitors’ strategies and customers’ demands. Target costing also requires that companies collect and use external information that may not be available or, if available, may not ordinarily be assessed by the Finance department. Finally, it illustrates the possibility of incorporating strategy into accounting and performance measurement more generally.
There are a number of ways of setting target costs, these include:
(a) determine the diﬀerence between allowable cost (selling prices–desired proﬁt) and forecast costs determined using current costs,
(b) determine the diﬀerence between allowable cost (using planning selling price net of the required return on sales) and current costs,
(c) apply the desired cost reduction to current costs The above description of target costing should be seen as broadly representative of what ought to be done rather than the organizational reality. There is evidence that Japanese ﬁrms often fail to make the target cost, at least prior to manufacture, and either adjust the target costs or decide not to continue with the product in its existing form. Target costing practices in Western enterprise likewise evidence a high degree of organizational speciﬁcity.
3.1.1 Tools for target costing.
In Japan, value engineering (VE) is an activity which helps to design products which meet customer needs at the lowest cost while assuring the required standard of quality and reliability. A number of tools are generally used in this activity.
3.1.2 Functional analysis.
The aim is to determine the functions of the product and indicate how far the design of these functions will satisfy the consumer (as shown by market research) and at what cost relative to that part of the target cost pricing by elements allocated to that function. This allows the variance between the target cost-per-function and its current cost to be calculated. It also allows the contribution which a function makes to consumer needs to be ascertained relative to its cost, thereby leading to redesign where two items are not well matched (see Yoshikawa et al. 1993).
3.1.3 Cost tables.
Cost tables are detailed simulated databases of all the costs of producing a product, either for product functions or product components, based on a large variety of assumptions. They allow ‘what if’ questions to be posed relating to decisions to change any aspect of the product. A cost table will show the variety of cost performances when using diﬀerent types of materials for a given component. The data in cost tables will be accepted by all members of the organization, and therefore ensure common thinking throughout. There will be a cost table for each part of the product’s lifecycle.
3.1.4 Value engineering collections.
These are libraries of case studies of the detailed experience from previous VE activity, the use of which is to improve future target costing and VE. Of course, all the other well-known techniques used in Japan, such as just-in-time methods and quality circles, are utilized, where appropriate, in target-costing exercises.
Enterprise cost structure in Japan is such that, on average, material and components account for some 60 percent of cost, direct labor some 14 percent, and overheads some 24 percent (Bhimani and Bromwich 1996), though these percentages can vary substantially across ﬁrms and industries. Comparative US ﬁgures are material and component costs (53 percent), direct labor (15 percent) and overheads (32 percent). Possibly, high overhead cost incursions could be a signal that for some ﬁrms, much may be gained from the market-derived discipline that is evident in the targetcost-management process.
3.2 Activity Costing
Concerns about overhead allocation have been voiced by many managers and, perhaps more importantly, the need to account in a way that encompasses the activities which cause costs rather than using traditional methods of overhead allocation is recognised by professional accounting bodies.
Activity based costing (ABC) emerged as a costmanagement approach during the late 1980s. It can be deﬁned as an approach to costing which focuses on activities as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as products, services or customers (Horngren et al. 2001). During the 1990s, it has increasingly been linked to managerial decisions via time, market, strategy, and quality issues. Examples of ABC calculation can be found in Bromwich and Bhimani (1994) and Yoshikawa et al. (1993).
The published evidence on the payoﬀs and costs of installing activity-based cost and management information systems is not unequivocal (Bromwich and Bhimani 1994).
Partly, this is because seeking an association between major changes in organizational and management structures and management accounting is a diﬃcult and time-consuming exercise. The practicing management accountant must be satisﬁed that the beneﬁts likely to accrue from any change will outweigh its costs, though cost-beneﬁt quantiﬁcation is not a straight forward proposition. Moreover, abstract, theoretical concepts do not tend to succeed in achieving implementation in organizations. To date, there is little evidence that any new accounting method that attempts to facilitate the management decision-making process actually increases the ability to generate greater proﬁts, though providing such evidence is very diﬃcult.
Ascribing increased proﬁtability to the implementation of a costing technique, such as ABC, is a diﬃcult exercise. Problems arise in tracing changes in the ‘bottom line’ to managerial action associated with altered costing information. The inability to isolate the eﬀects of a single change such as the adoption of ABC ceteris paribus, and to use another company as a ‘control’ for comparative purposes, makes any assertion of a proﬁtability link dubious. This is especially so because changes in organizations often come in bundles, after, for example, the appointment of a new managerial team. Perhaps the ultimate test of establishing whether a switch from a traditional cost system to ABC yields increased beneﬁts is a market test that seeks to ascertain whether such a switch becomes a permanent one for a suﬃciently large number of companies adopting ABC. Given the relative novelty of this costing approach, however, this test is diﬃcult to apply. Nevertheless, in various surveys of ABC ABM implementations in UK ﬁrms, Innes et al. (2000) report that, whereas in 1995 13.2 percent of companies rejected the technique, 15.3 percent did so in 1999. They conclude:
All in all, the survey results are not indicative of any further growth in ABC M but rather suggest at best a levelling oﬀ in the extent of its use in our largest companies.
There are many managers who believe that activitybased accounting methods have changed their approach to decision-making, indirectly yielding increased proﬁts and, more importantly, a much better understanding of their business (see Cooper and Kaplan 1999, for case studies). Some problems still exist with overhead allocation where, for instance, the source of the overhead is diﬃcult to trace or is sunk or is common to diverse activities. Arbitrariness and judgment will, therefore, continue to signiﬁcantly aﬀect overhead cost accounting. There is strong support, however, for the argument that dynamic and changing manufacturing (and non-manufacturing) environments render redundant, conventional costaccounting systems that emphasize information priorities other than those emerging as virtually indispensable in today’s competitive marketplace. For example, strategic cost analysis, cost-beneﬁt appraisal for long-term projects, life-cycle consideration, quality, and customer satisfaction data are likely to become increasingly meaningful in service and manufacturing environments (Bromwich and Bhimani 1994).
4. The Future of Management Accounting
While many other management-accounting approaches have been, and continue to be, developed, aside from activity accounting and target costing, some concerns have been voiced concerning the future fate of management-accounting practices. King (1997), for instance, believes that many management accountants complain that—while their skills may be valued—they are often excluded from management decision making. Accountants are often not seen as starting players on the management team, in part because of their training, which emphasizes precision and accuracy at the expense of relevance. King (1997) suggests that recognizing that there is more judgment—and less precision—in accounting is a ﬁrst step in what may have to be an extensive program to ensure that accountants will survive into the twenty-ﬁrst century.
Foster (1996), likewise, believes that change is required in the way in which management accountants operate. Management accounting is in a continual state of adaptation as the knowledge base in the ﬁeld increases and the business environment changes. According to Foster 1996), management accounting has often been portrayed as focusing too much on internal reporting and on providing information for statutory ﬁnancial reporting. This portrayal is seen as inadequate now, and after 2000 it will be even more so. In the future, decisions about which activities to outsource, and how to structure joint ventures with other organizations will be critical management responsibilities. Management will seek ﬁnancial information to help plan and monitor ongoing relationships with external partners. Foster (1996) notes that, in the future, we will seek greater recognition of root-cause cost drivers as well as cost drivers arising within and across functions.
According to Flegm (1996), skill with numbers is not enough. Accountants of the future must be experts in the basic disciplines of business, yet also generalists who can manage diﬀerent disciplines, communicate with clients, and motivate employees. The call for more strategic management accountants, likewise, still rings loud. Kaplan and Norton (1996, 2000) considers that advances in the 1990s have made it possible for management accountants to become part of their organization’s value-added team. Management accountants must participate in the formulation and implementation of strategy (Kaplan, 1995), and help translate strategic intent and capabilities into operational and managerial measures.
Management accountants have to move away from being scorekeepers of the past and to become the designers of the organization’s critical management information systems. Existing performance measurement systems, including those based on activity accounting, focus on improving existing processes. The balanced scorecard, according to Kaplan (1995), by contrast, focuses on what new processes are needed to achieve breakthrough performance objectives for customers and shareholders.
This call has been voiced in parallel to that for altering management accountants’ patterns of behavior (Johnson 1995). In the past, management accountants focused on how to disclose and report ﬁnancial accounting numbers, especially cost numbers, so that managers could draw from them more useful information. According to Johnson (1995), instead of focusing on achieving targets, companies intent on achieving positive long-term results should focus on mastering disciplined and standardized patterns of behavior. Management accountants should work to create channels through which people inquire openly about purpose and method. In this light, Borthick and Roth (1997) note that the management-accounting systems of the future will be a large, real-time database whose data managers anywhere will be able to retrieve, manipulate, and analyze for new problems as they arise. The choice that companies face is whether to be startled by what the future brings or to embrace the future by implementing organization-wide database systems to reap the beneﬁts of better data access.
What seems evident is that each decade brings with it pressures for changing management accounting, as well as diﬀerent perceptions of the implications of such pressures. The late 1990s heralded in the New Economy where past conceptions of proper organizational management are viewed as being in need of change. A renaissance of liberalization from the past is deemed essential by many old industrial ﬁrms facing competition by new giants that did not exist only ﬁve years before. The Internet economy has made ‘modern’ management techniques ancestral. Bricks and mortar cardinal principles are being eschewed and replaced by evolving bricks and mortar truths. Life-cycle costers are now to move at an Internet time pace. Balancedscorecard adopters must tackle new forms of imbalance. Activity accounting systems must begin to appeal to cyber-based cost drivers. Target cost management must now capture the nuances of ephemeral web markets. While little can be said of where—if anywhere—the future will take management accounting, pundits will continue to dwell on what is essential for its well being.
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