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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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able to present an external image of ‘success’... and hence conceals the possibility of the damaging strategic consequences for individual business units of Conglom’s exclusive preoccupation with financial returns. (p. 124) In adopting a critical perspective, Miller and O’Leary (1987) described the construction of theories of standard costing in the period 1900–30, which they viewed as ‘an important calculative practice which is part of a much wider modern apparatus of power’ aimed at ‘the construction of the individual person as a more manageable and efficient entity’ (p. 235). The contribution of standard costing was to show how ‘the life of the person comes to be viewed in relation to standards and norms of behaviour’ (p. 262).

Laughlin (1996) played on ‘principal and agent’ theory to question the legitimacy of the principal’s economic right to define the activities of the agent. He coined ‘higher principals’ to refer to the values held, particularly in the caring professions (education, health and social services), which could, he argued, overrule the rights of economic principals. These higher principals could be derived from religion, professional bodies or personal conscience.

Broadbent and Laughlin (1998) studied schools and GP (medical) practices and identified financial reforms as ‘an unwelcome intrusion into the definition of professional activities’ (p. 404), which lead to resistance in the creation of ‘informal and formal ‘‘absorption’’ processes to counteract and ‘‘mute’’ the changes’ (p. 405).

Similarly, Covaleski et al. (1998) studied the ‘Big Six’ accounting firms, where management by objectives and mentoring were used as techniques of control, revealing that the ‘discourse of professional autonomy’ fuelled resistance to these changes.

Finally, the limitations of formal accounting have been identified in academic research. For example, Preston (1986) explained how ‘the process of informing was fundamentally different to the formal or official documented information systems’ (p. 523). In Preston’s study, managers arranged to inform each other, predominantly through interaction, observation and keeping personal records but to a lesser extent through meetings. It was through these interactions that managers found out what was going on. They found ‘the official documented information to be untimely, lacking in detail and sometimes inaccurate’ (p. 535).

The overhead allocation problem is illustrated in the next case study.


Case study: Quality Bank – the overhead allocation problem Quality Bank has three branches and a head office. Table 11.9 shows how the accounting system, based on absorption costing, has calculated the costs for each branch. Direct costs of £104,000 are traceable based on staff working in each location. Overhead costs of £400,000 for the bank have been allocated as a percentage of the direct labour cost.

The bank used its internal staff to study the effects of introducing an activitybased costing system. Table 11.10 shows the cost pools and cost drivers that were identified.

The bank calculated costs for each cost driver as shown in Table 11.11. It then analysed the transaction volume for each of its branches and head office. These figures are shown in Table 11.12.

Table 11.9 Quality Bank – direct costs and allocated overheads by branch

–  –  –

The bank was then able to apply the cost per cost driver against the actual transaction volume for each branch and head office. This resulted in the cost analysis shown in Table 11.13. A comparison of the costs allocated to each branch under absorption and activity-based costing is shown in Table 11.14.

The ABC approach revealed that many of the costs charged to head office under absorption costing should be charged to branches based on transaction volumes.

This had a significant impact on the measurement of branch profitability and Table 11.13 Quality Bank – cost analysis using ABC

–  –  –

the profitability of different business segments (e.g. new accounts, lending, ATM transactions etc.).

Conclusion In Chapters 8, 9 and 10, various accounting techniques were identified that can be used by non-financial managers as part of the decision-making process. With the shift in most western economies to service industries and high-technology manufacture, overheads have increased as a proportion of total business costs.

This chapter has shown the importance to decision-making of the methods used by accountants to allocate overheads to products/services. Understanding the methods used, and their limitations, is essential if informed decisions are to be made by non-financial managers.

This chapter has also shown that we need to consider the underlying assumptions behind the management accounting techniques that are in use. Other countries adopt different approaches and we have something to learn from the success or failure of those practices. We also need to consider the behavioural consequences of the choices made in relation to accounting systems.

References Alexander, D. and Nobes, C. (2001). Financial Accounting: An International Introduction.

Harlow: Financial Times/Prentice Hall.

Berry, A. J., Capps, T., Cooper, D., Ferguson, P., Hopper, T. and Lowe, E. A. (1985). Management control in an area of the NCB: Rationales of accounting practices in a public enterprise. Accounting, Organizations and Society, 10(1), 3–28.

Broadbent, J. and Laughlin, R. (1998). Resisting the ‘new public management’: Absorption and absorbing groups in schools and GP practices in the UK. Accounting, Auditing and Accountability Journal, 11(4), 403–35.

Burchell, S., Clubb, C., Hopwood, A. and Hughes, J. (1980). The roles of accounting in organizations and society. Accounting, Organizations and Society, 5(1), 5–27.

Clark, J. M. (1923). Studies in the Economics of Overhead Costs. Chicago, IL: University of Chicago Press.

Cooper, D. J., Hayes, D. and Wolf, F. (1981). Accounting in organized anarchies: Understanding and designing accounting systems in ambiguous situations. Accounting, Organizations and Society, 6(3), 175–91.

Covaleski, M. A., Dirsmith, M. W., Heian, J. B. and Samuel, S. (1998). The calculated and the avowed: Techniques of discipline and struggles over identity in big six public accounting firms. Administrative Science Quarterly, 43, 293–327.

Currie, W. (1995). A comparative analysis of management accounting in Japan, USA/UK and west Germany. In D. Ashton, T. Hopper and R. W. Scapens (eds), Issues in Management Accounting (2nd edn), London: Prentice Hall.

Demirag, I. S. (1995). Management control systems of Japanese companies operating in

the united kingdom. In A. J. Berry, J. Broadbent and D. Otley (eds), Management Control:

Theories, Issues and Practices, Basingstoke: Macmillan.

Dent, J. F. (1991). Accounting and organizational cultures: A field study of the emergence of a new organizational reality. Accounting, Organizations and Society, 16(8), 705–32.

ACCOUNTING DECISIONS 179 Drury, C. and Tayles, M. (2000). Cost System Design and Profitability Analysis in UK Companies, London: Chartered Institute of Management Accountants.

Fisher, J. (1995). Contingency-based research on management control systems: Categorization by level of complexity. Journal of Accounting Literature, 14, 24–53.

Hiromoto, T. (1991). Another Hidden Edge – Japanese Management Accounting, Getting Numbers You Can Trust: The New Accounting. Boston, MA: Harvard Business Review Paperback.

Hopper, T., Otley, D. and Scapens, B. (2001). British management accounting research:

Whence and whither: Opinions and recollections. British Accounting Review, 33, 263–91.

Johnson, H. T. and Kaplan, R. S. (1987). Relevance Lost: The Rise and Fall of Management Accounting. Boston, MA: Harvard Business School Press.

Kaplan, R. S. and Cooper, R. (1998). Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Boston, MA: Harvard Business School Press.

Laughlin, R. (1996). Principals and higher principals: Accounting for accountability in the caring professions. In R. Munro and J. Mouritsen (eds), Accountability: Power, Ethos and the Technologies of Managing, London: International Thomson Business Press.

Miller, P. (1994). Accounting as social and institutional practice: An introduction. In A. G. Hopwood and P. Miller (eds), Accounting as Social and Institutional Practice, Cambridge: Cambridge University Press.

Miller, P. and O’Leary, T. (1987). Accounting and the construction of the governable person.

Accounting, Organizations and Society, 12(3), 235–65.

Otley, D. (1980). The contingency theory of management accounting: Achievement and prognosis. Accounting, Organizations and Society, 5(4), 413–28.

Preston, A. (1986). Interactions and arrangements in the process of informing. Accounting, Organizations and Society, 11(6), 521–40.

Roberts, J. (1990). Strategy and accounting in a U.K. conglomerate. Accounting, Organizations and Society, 15(1/2), 107–26.

Williams, K., Haslam, C., Williams, J., Abe, M., Aida, T. and Mitsui, I. (1995). Management accounting: The western problematic against the Japanese application. In A. J. Berry, J. Broadbent and D. Otley (eds), Management Control: Theories, Issues and Practices, Basingstoke: Macmillan.

Strategic Investment Decisions We introduced strategy in Chapter 2 to explain its link with achieving shareholder value. In this chapter we are more concerned with strategy implementation through capital investment decisions and the tools used to evaluate those decisions.

Strategy Ansoff (1988) provided a typical description of strategy formulation: objectives and goals were established; then an internal appraisal of strengths and weaknesses and an external appraisal of opportunities and threats led to strategic decisions such as diversification or the formulation of competitive strategy. He established a hierarchy of objectives that were centred on performance measures such as return on investment (see Chapter 7, later in this chapter and Chapter 13).

A contrasting approach was developed by Quinn (1980), which he called logical incrementalism. Quinn argued against formal planning systems, which he believed had become ‘costly paper-shuffling exercises’, observing that ‘most major strategic decisions seemed to be made outside the formal planning structure’ (p. 2). Quinn

further argued that:

the real strategy tends to evolve as internal decisions and external events flow together to create a new, widely shared consensus for action among key members of the top management team. (p. 15) Logical incrementalism is similar to work by Mintzberg and Waters (1985), which defined strategy as a pattern in a stream of decisions. Mintzberg and Waters separated the intended from the realized strategy, arguing that deliberate strategies provided only a partial explanation, as some intended strategies were unable to be realized while other strategies emerged over time.

The difficulty for businesses in the twenty-first century is that they must continually adapt to technological and market change, making long-term strategy problematic. However, to give the external appearance of being well managed they need to develop strategies, even if only to legitimize what senior managers are doing. Nevertheless, strategy can be crucial in enabling a business to be proactive in increasingly competitive and turbulent business conditions. The absence of strategy can lead to reactivity and a steady erosion of market share.


As we saw in Chapter 8, Porter (1980) developed his ‘five forces’ model for analysing an industry. This focused on the effects of rivalry among existing firms, the threat of new entrants, the bargaining power of suppliers and customers, and the threat of substitute products and services. Porter also identified three ‘generic strategies’ for competitive advantage: cost leadership, differentiation and focus. Cost leadership requires efficiency, tight cost control and the avoidance of unprofitable work, with low cost a defence against competition. Differentiation can be achieved through, for example, brand image, technology or a unique distribution channel. These factors insulate against price competition because of brand loyalty and lower customer sensitivity to pricing differences. Focus emphasizes servicing a particular market segment (whether customer, territory or product/service) better than competitors who may be competing more broadly. In his second book, Porter (1985) introduced the ‘value chain’ as a tool to help create and sustain competitive advantage (see Chapter 9).

However, the formulation of strategy is frequently divorced from the annual budgeting cycle (see Chapter 14), as organizations produce strategic planning documents separately from the annual budget based on last year plus or minus a percentage in order to achieve short-term financial targets. Consequently, the issue of translating strategy formulation into implementation is problematic unless resource allocations follow strategy.

In their most recent addition to the strategy literature, Kaplan and Norton (2001) built on the success of their Balanced Scorecard approach (see Chapter 4) to emphasize the ‘strategy-focused organization’ that links financial performance with non-financial measures. Non-financial measures in the Balanced Scorecard measure how well the organization is meeting the targets established in its strategy.

Kaplan and Norton use ‘strategy maps’ to identify cause–effect relationships, although these should be modified over time as a result of experience gained within organizations. They also argued that budgetary allocations and incentives need to be consistent with strategy, while reflecting the importance of continual learning and improvement.

One of the most important elements of strategy implementation is capital investment decision-making, because investment decisions provide the physical and human infrastructure through which businesses produce and sell goods and services. This is the topic of this chapter.

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