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The ﬁrm has been victimized by diseconomies of scope. In trying to obtain the beneﬁts of economy of scale by expanding its product offerings to better utilize its ﬁxed or capacity resources, the ﬁrm does not see the high diseconomies it has introduced by creating a far more complex production environment. The cost accounting system fails to reveal this diseconomy of scope.
A comprehensive cost system One message comes through overwhelmingly in our experiences with the three ﬁrms, and with the many others we talked and worked with. Almost all product-related decisions – introduction, pricing, and discontinuance – are longterm. Management accounting thinking (and teaching) during the past half-century has concentrated on information for making short-run incremental decisions based on variable, incremental, or relevant costs. It has missed the most important aspect of product decisions. Invariably, the time period for measuring ‘‘variable,’’ ‘‘incremental,’’ or ‘‘relevant’’ costs has been about a month (the time period corresponding to the cycle of the ﬁrm’s internal ﬁnancial reporting system). While academics admonish that notions of ﬁxed and variable are meaningful only with respect to a particular time period, they immediately discard this warning and teach from the perspective of one-month decision horizons.
This short-term focus for product costing has led all the companies we visited to view a large and growing proportion of their total manufacturing costs as ‘‘ﬁxed.’’ In fact, however, what they call ‘‘ﬁxed’’ costs have been the most variable and rapidly increasing costs. This paradox has seemingly eluded most accounting practitioners and scholars. Two fundamental changes in our thinking about cost behavior must be introduced.
First, the allocation of costs from the cost pools to the products should be achieved using bases that reﬂect cost drivers. Because many overhead costs are driven by the complexity of production, not the volume of production, nonvolume-related bases are required. Second, many of these overhead costs are somewhat discretionary. While they vary with changes in the complexity of the production process, these changes are intermittent. A traditional cost system that deﬁnes variable costs as varying in the short term with production volume will misclassify these costs as ﬁxed.
The misclassiﬁcation also arises from an inadequate understanding of the actual
cost drivers for most overhead costs. Many overhead costs vary with transactions:
ACCOUNTING FOR MANAGERStransactions to order, schedule, receive, inspect, and pay for shipments; to move, track, and count inventory; to schedule production work; to set up machines;
to perform quality assurance; to implement engineering change orders; and to expedite and ship orders. The cost of these transactions is largely independent of the size of the order being handled; the cost does not vary with the amount of inputs or outputs. It does vary, however, with the need for the transaction itself.
If the ﬁrm introduces more products, if it needs to expedite more orders, or if it needs to inspect more components, then it will need larger overhead departments to perform these additional transactions.
Product costs are almost all variable costs. Some of the sources of variability relate to physical volume of items produced. These costs will vary with units produced, or in a varied, multiproduct environment, with surrogate measures such as labor hours, machine hours, material dollars and quantities, or elapsed time of production. Other costs, however, particularly those arising from overhead support and marketing departments, vary with the diversity and complexity in the product line. The variability of these costs is best explained by the incidence of transactions to initiate the next stage in the production, logistics, or distribution process.
A comprehensive product cost system, incorporating the long-term variable costs of manufacturing and marketing each product or product line, should provide a much better basis for managerial decisions on pricing, introducing, discontinuing, and reengineering product lines. The cost system may even become strategically important for running the business and creating sustainable competitive advantages for the ﬁrm.
The importance of ﬁeld research
The accompanying article, coauthored with Robin Cooper, is excerpted from Accounting & Management: Field Study Perspectives (Boston, Mass., Harvard Business School Press, 1987) William J. Bruns, Jr. and Robert S. Kaplan (eds.). The book contains 13 ﬁeld studies on management accounting innovations presented at a colloquium at the Harvard Business School in June 1986 by leading academic researchers from the U.S. and Western Europe. The colloquium represents the largest single collection of ﬁeld research studies on management accounting practices in organizations.
The HBS colloquium had two principal objectives. First, the authors were to understand and document the management accounting practices of actual organizations. Some of the organizations would be captured in a process of transition: attempting, and occasionally succeeding to modify their systems to measure, motivate and evaluate operating performance. Other organizations were studied just to understand the system of measurement and control that had evolved in their particular environment.
HOW COST ACCOUNTING DISTORTS PRODUCT COSTS 269A second, and even more important, objective of the colloquium was to begin the process by which ﬁeld research methods in management accounting could be established as a legitimate method of inquiry. Academic researchers in accounting have extensive experience with deductive, model-building, analytic research with the design and analysis of controlled experiments, usually in a laboratory setting;
and with the empirical analysis of large data bases. This experience has yielded research guidance and criteria that, while not always explicit, nevertheless are widely shared and permit research to be conducted and evaluated.
At a time when so many organizations are reexamining the adequacy of their management accounting systems it is especially important that university-based researchers spend more time working directly with innovating organizations. We are pleased that MANAGEMENT ACCOUNTING, through publication of this article, is helping to publicize the existence of the ﬁeld studies performed to date.
The experiences described in the accompanying article, as well as in the other papers in the colloquium volume, indicate a very different role for management accounting systems in organizations than is currently taught in most of our business schools and accounting departments. We believe that present and future ﬁeld research and casewriting will lead to major changes in management accounting courses. To facilitate the needed changes in curriculum and research, however, requires extensive cooperation between university faculty and practicing
management accountants. As noted by observers at the Harvard colloquium:
There is a tremendous store of knowledge about management accounting practices and ideas out there in real companies. Academicians as a whole are far too ignorant of that knowledge. When academics begin to see the relevance of this data base, perhaps generations of students will become more aware of its richness. Such awareness must precede any real progress on prescribing good management accounting for any given situation.
To observe is also to discover. The authors have observed interesting phenomena.
We do not know how prevalent these phenomena are or under what conditions they exist or do not exist. But the studies suggest possible relationships, causes, effects, and even dynamic process in the sense that Yogi Berra must have had in mind when he said, ‘‘Sometimes you can observe a lot just by watching.’’ With the research support and cooperation of the members of the National Association of Accountants, many university professors are looking forward to watching and also describing the changes now under way so that academics can begin to develop theories, teach, and ﬁnally prescribe about the new opportunities for management accounting.
Robert S. Kaplan Endnotes 1 Mayers Tap (disguised name) is described in Harvard Business School, case series 9-185-111. Schrader-Bellows is described in HBS Case Series 9-186-272.
ACCOUNTING FOR MANAGERSRobin Cooper is an associate professor of business administration at the Harvard Business School and a fellow of the Institute of Chartered Accountants in England and Wales.
He writes a column, ‘‘Cost Management Principles and Concepts,’’ in the Journal of Cost Management and has produced research on activity- based costing for the CAM-1 Cost Management System Project. Robert S. Kaplan is the Arthur Lowes Dickinson Professor of Accounting at the Harvard Business School and a professor of industrial administration at Carnegie-Mellon University. Currently, Professor Kaplan serves on the Executive Committee of the CAM-1 Cost Management System Project, the Manufacturing Studies Board of the National Research Council, and the Financial Accounting Standards Advisory Committee.
Reading B Otley, D. T., Broadbent, J. and Berry, A. J. (1995). Research in management control: An overview of its development. British Journal of Management, 6, Special Issue, S31–S44.
John Wiley & Sons Limited. Reproduced with permission.
Questions 1 What is the distinction made by Otley et al. between management control and ﬁnancial control?
2 What is the contribution of systems theory to an understanding of management control?
3 How does Scott’s distinction between open and closed, rational and natural models help to categorize the accounting literature, and why is any such categorization important?
4 Why does an emphasis on accounting limit an understanding of the broader importance of management control? What contribution can non-ﬁnancial performance management make to our understanding of management control within organizations?
Further reading Berry, A. J., Broadbent, J. and Otley, D. (eds). (1995). Management Control: Theories, Issues and Practices. London: Macmillan.
Fitzgerald, L., Johnston, R., Brignall, S., Silvestro, R. and Voss, C. (1991). Performance Measurement in Service Businesses. London: Chartered Institute of Management Accountants.
Hopper, T., Otley, D. and Scapens, B. (2001). British management accounting research:
Whence and whither: Opinions and recollections. British Accounting Review, 33, 263–91.
Humphrey, C. and Scapens, R. W. (1996). Theories and case studies of organizational and accounting practices: Limitation or liberation? Accounting, Auditing and Accountability Journal, 9(4), 86–106.
Kaplan, R. S. and Norton, D. P. (2001). The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Boston, MA: Harvard Business School Press.
Macintosh, N. B. (1994). Management Accounting and Control Systems: An Organizational and Behavioral Approach. Chichester: John Wiley & Sons.
Otley, D. (1999). Performance management: A framework for management control systems research. Management Accounting Research, 10, 363–82.
ACCOUNTING FOR MANAGERSOtley, D. (2001). Extending the boundaries of management accounting research: Developing systems for performance management. British Accounting Review, 33, 243–61.
Scott, W. R. (1998). Organizations: Rational, Natural, and Open Systems. (4th edn). Upper Saddle River, NJ: Prentice Hall International, Inc.
Research in Management Control:
An Overview of its Development David Otley∗, Jane Broadbent† and Anthony Berry‡ ∗ Lancaster University Management School, † Department of Accounting and Financial Management, University of Essex and ‡ Manchester Business School Summary This paper builds on a series of earlier reviews of the management control literature (Giglioni and Bedeian, 1974; Hofstede, 1968; Merchant and Simons, 1986; Parker,
1986) and considers the development of the management control literature in the context of organizational theories. Early themes which have provided the roots for the development of the subject area are explored as is more recent work which has evolved both as a continuation and a reaction against them, with Scott’s (1981) framework being used to organize this literature. It is argued that one of the unintended consequences of the inﬂuential work of Robert Anthony (1965) has been a restriction of the subject to an accounting-based framework and that this focus needs to be broadened. The review points to the potential of the subject as a integrating theme for the practice and research of management and some themes for future research are suggested.
Introduction This paper reviews the development of research in management control, building upon other reviews both to examine the roots of the subject from the turn of the century and to demonstrate the depth and breadth of the subject. Four previous reviews form the foundation for our overview.
Giglioni and Bedeian (1974) review the contribution of the general management and organizational theory literature for the period 1900–1972, drawing out several different strands to conclude that ‘even though control theory has not achieved the level of sophistication of some other management functions, it has developed to a point that affords the executive ample opportunity to maintain the operations of his ﬁrm under check.’ Parker (1986) argues that accounting control developments lagged developments in the management literature, and criticizes accounting models for offering only