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«Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»

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Otley (1980) argued that a simple linear explanation was inadequate. The linear explanation assumed that contingent variables affected organizational design, which in turn determined the type of accounting/control system in use and led to organizational effectiveness. Otley emphasized the importance of other controls outside accounting, how many factors other than control system design influenced organizational performance and that organizational effectiveness is itself difficult to measure. He argued that the contingent variables were outside the control of the organization, and those that could be influenced were part of a package of organizational controls including personnel selection, promotion and ACCOUNTING DECISIONS 171 reward systems. Otley also argued that there were intervening variables that, together with the contingent variables, influenced organizational effectiveness, which was measured in relation to organizational objectives. Otley believed that an organization ‘adapts to the contingencies it faces by arranging the factors it can control into an appropriate configuration that it hopes will lead to effective performance’ (p. 421).

In Chapters 1 and 2, the comment by Clark (1923) that there were ‘different costs for different purposes’ can be seen as an early understanding of the application of the contingency approach. Clark further commented that ‘there is no one correct usage, usage being governed by the varying needs of varying business situations and problems’. This reflected the need to use cost information in different ways depending on the circumstances, which has been the focus of Chapters 8 to 10.

International comparisons

Alexander and Nobes (2001) described various approaches to categorizing international differences in accounting, including:

ž legal systems;

ž commercially driven, government-driven or professional regulation;

ž strength of equity markets.

Alexander and Nobes argued that legal systems, tax systems and the strength of the accountancy profession all influence the development of accounting, but the main explanation for the most important international differences in financial reporting is the financing system (such as the size and spread of corporate shareholding).

There have been efforts to harmonize financial reporting within the European Union, although these have been slow. Through the International Accounting Standards Committee (IASC) there are moves towards harmonization, to a large extent following US practices. This is likely to be a continuing trend given the globalization of capital markets. Whether there will be any effect of harmonization on management accounting practices is as yet unknown.

In understanding management accounting, practising managers and students of accounting receive little exposure to management accounting practices outside the UK and US. It is important to contrast the UK/US approach with other practices, particularly those in Japan. These practices are different because they are predicated on different assumptions, particularly the different emphases on long-term strategies for growth versus short-term strategies for shareholders.

There are historical, cultural, political, legal and economic influences underlying the development of different management accounting techniques in that country, to take a single example.

Management accounting in Japan Japan has a strong history of keiretsu, the interlocking shareholdings of industrial conglomerates and banks, with overlapping board memberships. This has, at


least in part, influenced long-term strategy because of the absence of strong stock market pressures for short-term performance, as is the case in the UK and US.

Demirag (1995) studied three Japanese multinationals with manufacturing subsidiaries in the UK, two in consumer electronics and one in motor vehicles.

The companies had strongly decentralized divisional profit responsibilities with autonomous plants focused on target results. A complex matrix structure resulted in reporting to general management in the UK as well as to functional and product management in Japan. The company’s basic philosophy was that the design team was responsible for profit. Continuous processes were in place to monitor and reduce production costs.

According to Demirag (1995), Japanese companies exhibited a strategic planning style of management control rather than an emphasis on financial control. The strategic planning systems were bureaucratic, although business units gave top management the information necessary to formulate and implement plans. As Japanese managers move frequently between plants and divisions, they have a better understanding of communication and co-ordination than their British counterparts. Japanese managers put the interest of the organization above their own divisions. There is less attention to accounting and management control than to smooth production and quality products. Performance targets were set in the context of strategy but were flexible, with results expected in the longer term.

Manufacturing and sales were independent of each other, each having its own profit responsibility, the underlying principle being that each side of the business drives the other to be more effective and efficient. Although traditionally manufacturing had the greatest negotiating power, this did lead to a failure of market information reaching top decision-makers in Japan. There was a top-down approach to capital investment decisions, with managers taking a strategic and company-wide perspective that reduced the importance of financial decisions, with ROI not being seen as a particularly useful measure.

Pressures to meet short-term financial targets were not allowed to detract from long-term progress. In performance measurement, much more emphasis was placed on design, production and marketing than on financial control, although profit was increasing in importance. Although fixed and variable costs were used, the main emphasis was on market-driven product costing, i.e. target costing, on the assumption that if market share increased the cost per unit would reduce, which would enable prices to be reduced and so prevent competition. Overhead allocation was not important, but there was a focus on how the allocation techniques used encouraged employees to reduce costs.

Hiromoto (1991) described Japanese management accounting practices and the central principle that accounting policies should be subservient to corporate strategy, not independent of it. Japanese companies use accounting systems more to motivate employees to act in accordance with long-term manufacturing strategies. Japanese management accounting does not stress optimizing within existing constraints, but encourages employees to make continual improvements by tightening operations.

Hiromoto describes the example of Hitachi, which used direct labour hours as the overhead allocation base as this ‘creates the desired strong pro-automation ACCOUNTING DECISIONS 173 incentives throughout the organization’ (p. 68). By contrast, another Hitachi factory uses the number of parts as the allocation base in order to influence product engineering to drive reductions in the number of parts. Standard costs are not used in Japan as they are in the West. A market-driven target costing approach ‘emphasizes doing what it takes to achieve a desired performance level under market conditions... how efficiently it must be able to build it for maximum marketplace success’ (Hiromoto, 1991, p. 70). Overall, Japanese accounting policies are subservient to strategy.

Williams et al. (1995) reported similar findings to Demirag and, taking a critical

perspective, asserted:

In Japanese firms financial calculations are integrated into productive and market calculations; the result is a three-dimensional view which denies the universal representational privilege of financial numbers. Furthermore the integration of different kinds of calculation broadens out the definition of performance and identifies new points of intervention in a way which undermines the privilege of financial guidance techniques; in Japanese firms the main practical emphasis is on productive and market intervention rather than orthodox financial control. (p. 228) In Japan, production engineering knowledge has an equal or higher status to accounting knowledge, with the result that, for example in Toyota, the ‘visible benefits’ of lower inventory in the financial statements was outweighed by the invisible production benefits, ‘especially the ability to run mixed model lines in a small batch factory’ (Williams et al., 1995, p. 233).

Currie (1995) undertook a comparative study of costing and investment appraisal for the evaluation of advanced manufacturing technology (AMT).

Research identified that Japanese managers were uninterested in new management accounting techniques such as activity-based costing, since knowledge that some products were more expensive to produce than others was not important to product strategy decisions. On the contrary, expensive products were likely to have strategic value to the company.

Japanese companies emphasize costing in the pre-manufacturing phase through target and lifecycle costing (see Chapter 9). In investment decisions, Japanese managers stress the qualitative benefits of AMT such as quality control, scrap, rework, service costs, space saving etc. These are difficult to quantify. ROI measures are considered unhelpful because the focus on short-term returns overestimates the cost of capital and results in discounted cash flow hurdles (see Chapter 12) being too high. Japanese companies did, however, use simple payback calculations with targets of between two and five years.

Behavioural implications of management accounting Hopper et al. (2001) traced the rise of behavioural and organizational accounting research from 1975. In the UK, a paradigm shift occurred that did not happen in the US (where agency theory – see Chapter 6 – has been the dominant research


approach). In the UK, contingency theory and neo-human relations approaches were abandoned for more sociological and political approaches that drew from European social theory and were influenced by Scandinavian case-based research.

Burchell et al. (1980) argued:

What is accounted for can shape organizational participants’ views of what is important, with the categories of dominant economic discourse and organizational functioning that are implicit within the accounting framework helping to create a particular conception of organizational reality. (p. 5) Similarly, Miller (1994) argued that accounting was a social and institutional practice. Accounting is not a neutral device that merely reports ‘facts’ but a set of practices that affects the type of world in which we live, the way in which we understand the choices able to be made by individuals and organizations, and the way in which we manage activities. Miller argued that ‘to calculate and record the costs of an activity is to alter the way in which it can be thought about and acted upon’ (p. 2).

Cooper et al. (1981) reflected that accounting systems are a significant component

of power in organizations:

Internal accounting systems by what they measure, how they measure and who they report to can effectively delimit the kind of issues addressed and the ways in which they are addressed. (p. 182) Various published research studies have adopted an interpretive or critical perspective in understanding the link between accounting systems, organizational change and the behaviour of people in organizations as a result of culture and power (see Chapter 5 for the theoretical framework of these subjects).

The interpretive perspective has provided a number of interesting studies. The study of an area of the National Coal Board by Berry et al. (1985) emphasized a dominant operational culture and the extent to which accounting reports were ‘ignored, trivialised and/or misunderstood’ (p. 16).

The accounting system was:

consistent with the values of the dominant managerial culture, and being malleable and ambiguous it reflected and helped coping with the uncertainties inherent with the physical task of coal extraction and its socioeconomic environment. (p. 22) Dent (1991) carried out a longitudinal field study of accounting change in EuroRail (which is one of the readings in this book), in which organizations were portrayed as cultures, i.e. systems of knowledge, belief and values. Prior to the study the dominant culture was engineering and production, in which accounting was incidental. This was displaced by economic and accounting concerns that

constructed the railway as a profit-seeking enterprise. New accounts:

were coupled to organizational activities to reconstitute interpretations of organizational endeavour. Accounting actively shaped the dominant meanings given to organizational life... [in which a] new set of symbols, rituals and language emerged. (p. 708) ACCOUNTING DECISIONS 175 Dent traced the introduction of a revised corporate planning system, the amendment of capital expenditure approval procedures and the revision of budgeting systems, each of which gave power to business managers, and described how accounting played a role ‘in constructing specific knowledges’ (p. 727).

Roberts (1990) studied the acquisition and subsequent management of ELB Ltd by Conglom Inc. Following acquisition, ‘the dominance of a production culture was instantly supplanted by the dominance of a purely financial logic’ and the sale of the European operations to a competitor ‘signalled the dominance of corporate financial concerns over long term market concerns’ (p. 123), although this was reinforced by share options, bonuses and managers’ fear of exclusion. Accounting

information was:

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