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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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Over time, the product range expanded and businesses sought economies of scope through producing two or more products in a single facility. This led to the need for better information about how the mix of products could improve total profits. However, after 1900 the production of accounting information was largely for external reporting to shareholders and not to assist managerial decisionmaking.

Johnson and Kaplan (1987) described how a management accounting system must provide timely and accurate information to facilitate efforts to control costs, to measure and improve productivity, and to devise improved production processes. The management accounting system must also report accurate product costs so that pricing decisions, introduction of new products, abandonment of obsolete products, and response to rival products can be made. (p. 4)

The Chartered Institute of Management Accountants’ definition of the core activities of management accounting includes:


ž participation in the planning process at both strategic and operational levels, involving the establishment of policies and the formulation of budgets;

ž the initiation of and provision of guidance for management decisions, involving the generation, analysis, presentation and interpretation of relevant information;

ž contributing to the monitoring and control of performance through the provision of reports including comparisons of actual with budgeted performance, and their analysis and interpretation.

One of the earliest writers on management accounting described ‘different costs for different purposes’ (Clark, 1923). This theme was developed by one of the earliest texts on management accounting (Vatter, 1950). Vatter distinguished the information needs of managers from those of external shareholders and emphasized that it was preferable to get less precise data to managers quickly than complete information too late to influence decision-making. Johnson and Kaplan (1987) commented that even today, organizations with access to far more computational power... rarely distinguish between information needed promptly for managerial control and information provided periodically for summary financial statements. (p. 161) They argued that the developments in accounting theory in the first decades of the twentieth century came about by academics who emphasized simple decision-making models in highly simplified firms – those producing one or only a few products, usually in a onestage production process. The academics developed their ideas by logic and deductive reasoning. They did not attempt to study the problems actually faced by managers of organizations producing hundreds or thousands of products in complex production processes. (p. 175)

They concluded:

Not surprisingly, in this situation actual management accounting systems provided few benefits to organizations. In some instances, the information reported by existing management accounting systems not only inhibited good decision-making by managers, it might actually have encouraged bad decisions. (p. 177) Johnson and Kaplan (1987) described how the global competition that has taken place since the 1980s has left management accounting behind in terms of its decision usefulness. Developments such as total quality management, just-in-time inventory, computer-integrated manufacturing, shorter product life cycles (see Chapter 9) and the decline of manufacturing and rise of service industries have led to the need for ‘accurate knowledge of product costs, excellent cost control, and coherent performance measurement’ (p. 220). And ‘the challenge for today’s competitive environment is to develop new and more flexible approaches to


the design of effective cost accounting, management control, and performance measurement systems’ (p. 224).

Recent developments in management accounting Partly as a result of the stimulus of Relevance Lost but perhaps more so as a consequence of rapidly changing business conditions, management accounting has moved beyond its traditional concern with a narrow range of numbers to incorporate wider issues of performance measurement and management. Management accounting is now implicated, to greater or lesser degrees in different

organizations, with:

ž value-based management;

ž non-financial performance measurement systems;

ž quality management approaches;

ž activity-based management; and ž strategic management accounting.

Value-based management is more fully described in Chapter 2, but is in brief a concern with improving the value of the business to its shareholders. Management accounting is implicated in this, as a fundamental role of non-financial managers is to make decisions that contribute to increasing the value of the business.

The limitations of accounting information, particularly as a lagging indicator of performance, have led to an increasing emphasis on non-financial performance measures, which are described more fully in Chapter 4. Non-financial measures are a major concern of both accountants and non-financial managers, as they tend to be leading indicators of the financial performance that will be reported at some future time.

Improving the quality of products and services is also a major concern, since advances in production technology and the need to improve performance by reducing waste have led to management tools such as total quality management (TQM), just-in-time (JIT), business process re-engineering (BPR) and continuous improvement processes such as Six Sigma and the Business Excellence model.

Management accounting has a role to play in these techniques (introduced in Chapters 9 and 15) and non-financial managers need to understand the relationships between accounting and new management techniques.

Activity-based management is an approach that emphasizes the underlying business processes that are required to produce goods and services and the need to identify the drivers or causes of those activities in order to be able to budget for and control costs more effectively. Activity-based approaches are introduced throughout Part II.

Strategic management accounting, which is described more fully in Chapter 4, is an attempt to shift the perceptions of accountants and non-financial managers from an inward-looking to an outward-looking one, recognizing the need to look beyond the business along the value chain to its suppliers and customers and to seek ways of achieving and maintaining competitive advantage.


These changes to the narrow view of accountants, from ‘bean-counters’ to more active participants in formulating and implementing business strategy, have been accompanied by a shift in the collection, reporting and analysis of routine financial information from accountants to non-financial line managers. This decentring of accounting is evidenced by the delegation of responsibility for budgets and cost control to line managers and is the underlying reason that non-financial managers need a better understanding of accounting information and how that information can be used in decision-making.

A critical perspective Although the concepts and assumptions underlying accounting are yet to be introduced, having begun this book with an introduction to accounting history it is worthwhile considering a contrasting viewpoint. While this viewpoint is one that may not be accepted by many practising managers, it is worth knowing, because it does lie at the very basis of the capitalist economic system in which we live, and in which accounting plays such an important role.

The Marxist historian Hobsbawm (1962) argued that colonialism had been created by the cotton industry that dominated the UK economy, and this resulted in a shift from domestic production to factory production. Sales increased but profits shrank, so labour (which was three times the cost of materials) was replaced by mechanization during the Industrial Revolution.

Entrepreneurs started with borrowings and small items of machinery and growth was largely financed by borrowings. The Industrial Revolution produced ‘such vast quantities and at such rapidly diminishing cost, as to be no longer dependent on existing demand, but to create its own market’ (Hobsbawm, 1962: 32).

Advances in mass production followed the development of the assembly line, supported by railways and shipping to transport goods, and communications through the electric telegraph. At the same time, agriculture diminished in importance. Due to the appetite of the railways for iron and steel, coal, heavy machinery, labour and capital investment, ‘the comfortable and rich classes accumulated income so fast and in such vast quantities as to exceed all available possibilities of spending and investment’ (Hobsbawm, 1962, p. 45).

While the rich accumulated profits, labour was exploited with wages at subsistence levels. Labour had to learn how to work, unlike agriculture or craft industries, in a manner suited to industry, and the result was a draconian master/servant relationship. In the 1840s a depression led to unemployment and high food prices and 1848 saw the rise of the labouring poor in European cities, who threatened both the weak and obsolete regimes and the rich.

This resulted in a clash between the political (French) and industrial (British) revolutions, the ‘triumph of bourgeois-liberal capitalism’ and the domination of the globe by a few western regimes, especially the British in the mid-nineteenth century, which became a ‘world hegemony’ (Hobsbawm, 1962).

This ‘global triumph’ of capitalism in the 1850s (Hobsbawm, 1975) was a consequence of the combination of cheap capital and rising prices. Stability and


prosperity overtook political questions about the legitimacy of existing dynasties and technology cheapened manufactured products. There was high demand but the cost of living did not fall, so labour became dominated by the interests of the new owners of the means of production. ‘Economic liberalism’ became the recipe for economic growth as the market ruled labour and helped national economic expansion. Industrialization made wealth and industrial capacity decisive in international power, especially in the US, Japan and Germany.

This ‘British’ capitalist system was exported throughout the world, not least with the support of a colonial expansionist Empire that lent large sums of money in return for adopting the British system. This system has since been taken over by multinational corporations, largely based in the United States.

Armstrong (1987) traced the historical factors behind the comparative (in relation to other professions) pre-eminence of accountants in British management hierarchies and the emphasis on financial control. He concluded that accounting controls were installed by accountants as a result of their power base in global capital markets, which was achieved through their role in the allocation of the profit surplus to shareholders. Armstrong argued that mergers led to control problems that were tackled by American management consultants who tended to recommend the multidivisional form of organization... [which] entirely divorce headquarters management from operations. Functional departments and their managers are subjected to a battery of financial indicators and budgetary controls... [and] a subordination of operational to financial decision-making and a major influx of accountants into senior management positions. (p. 433) Roberts (1996) suggested that organizational accounting embodies the separation

of instrumental and moral consequences, which is questionable. He argued:

The mystification of accounting information helps to fix, elevate and then impose upon others its own particular instrumental interests, without regard to the wider social and environmental consequences of the pursuit of such interests. Accounting thus serves as a vehicle whereby others are called to account, while the interests it embodies escape such accountability. (p. 59) This is a more critical perspective than that associated with the traditional notion of accounting as a report to shareholders and managers, which is a result of the historical development of capitalism in the West.

Conclusion While this book is designed to help non-financial managers understand the tools and techniques of accounting, it is also intended to make readers think critically about the role of accounting and the limitations of accounting, some of which have

been historically defined. One intention is to reinforce to readers that:


accounting information provides a window through which the real activities of the organization may be monitored, but it should be noted also that other windows are used that do not rely upon accounting information. (Otley and Berry, 1994, p. 46) References American Accounting Association (1996). A Statement of Basic Accounting Theory. Saratosa, FL: American Accounting Association.

Ansoff, H. I. (1988). The New Corporate Strategy. New York: John Wiley & Sons.

Armstrong, P. (1987). The rise of accounting controls in British capitalist enterprises.

Accounting, Organizations and Society, 12(5), 415–36.

Boland, R. J. and Schultze, U. (1996). Narrating accountability: Cognition and the production of the accountable self. In R. Munro and J. Mouritsen (eds), Accountability: Power, Ethos and the Technologies of Managing, London: International Thomson Business Press.

Chandler, A. D. J. (1962). Strategy and Structure: Chapters in the History of the American Industrial Enterprise. Cambridge, MA: Harvard University Press.

Chandler, A. D. J. (1990). Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, MA: Harvard University Press.

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

Hobsbawm, E. (1962). The Age of Revolution: Europe 1789–1848. London: Phoenix Press.

Hobsbawm, E. (1975). The Age of Capital: 1848–1875. London: Phoenix Press.

Hoskin, K. (ed.) (1996). The ‘awful idea of accountability’: Inscribing people into the measurement of objects. In R. Munro and J. Mouritsen (eds), Accountability: Power, Ethos and the Technologies of Managing, International Thomson Business Press.

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