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cant” impact on the outcome of their decisions. What was sur- prising was that 80% placed a medium to low priority on imple- menting new cost management tools and systems. Spread- sheets and traditional job and process costing still remain the preferred management accounting tools. The survey found that 72% of the respondents used homegrown solutions.
This dichotomy between a strong need for more accurate and comprehensive cost data and a reluctance to implement new tools and systems exists because the cost accounting sys- tem lies at the heart of any organization. It probably started in the early days of the company as a glorified checkbook.
Management was too preoccupied with more pressing concerns of production and sales to take time out and install a compre- hensive management accounting system. As the company grew, undocumented tweaks kept coming to how costs were recorded. Layers of methods and procedures grew along with sales. At some point, the company went to an automated sys- tem that meets some needs. Unmet needs wind up being solved through non-integrated procedures. Complicate things by adding that only one or two people might know the formulas that went into the spreadsheet.
Changing such a cost accounting system can require radical and costly alterations to the organization, both psychological and financial. This is why many organizations are extremely reluctant to tinker with their existing cost accounting system. As we saw with the development of activity-based costing in the last chapter, effective implementation requires a series of planned steps with strong management support to bring the organization to a readiness to accept ABC.
Still, the need to understand and control costs is so great, particularly with increasing globalization and competition, that management accounting tools are constantly developed, pre- sented, adopted, and, where successful, refined. Traditional per- formance measurement focused on financial accounting data starts to become less meaningful as a management-planning tool for growing information age companies. Many of the new
tools and concepts now come from business school research or private consultants. Lessons from enterprise-level software packages serving Fortune500 companies are being scaled for small and mid-sized business. At the same time, the manage- ment/cost accounting concept has grown to embrace a much wider scope than Andrew Carnegie’s fierce concentration on direct labor and materials cost. While the importance of accu- rate ledger entries for costs will continue indefinitely, how man- agers examine and interpret those costs is changing at some basic levels.
With change comes a certain amount of turmoil. Some solu- tions take an umbrella approach and cover everything. Others focus on deficiencies or improvements to current practices.
Caution and a clear understanding of requirements are neces- sary when looking at implementing a new management accounting system. Software companies have provided new packages with attractive capabilities but long and hard imple- mentation cycles. Sometimes companies have just failed,
Development of Management Accounting: Beginnings
Management accounting got a big push in the later 19th century with Andrew Carnegie, who was a demon for knowing and controlling his steel plants’ direct costs in labor and materials. Other businesses noted his success and copied him. In addition, the managers directly responsible for production largely developed the cost-
accounting metrics.They were principally engineers, not accountants, and took a solutions-based approach. Once accountants got involved, such useful concepts as depreciation and cost of capital crept into decision analysis.
Early in the 20th century, the development of the ROI models such as the Dupont model, discussed earlier, led to a greater emphasis on financial performance. Armies of clerks carried the country through the production boom of the war years and following.The traditional job and process costing systems went through incremental refine- ments. But the financial model started to show its limitations in the 1980s. (To be continued ....)
unable to sustain growth. They have left many an orphaned company limping along with hard-to-transfer data. Some of the
“B” school tools have a “flavor of the month” quality. They flare, fade, and are forgotten. Real-world considerations of internal support and technology capabilities coupled with a clear ROI path should determine which system you chose. As the technol- ogy matures, the more stable and useful approaches will
emerge.
We are going to look at six management/cost accounting systems that either are getting some traction or have special capabilities of management interest:
• balanced scorecard
• just-in-time inventory
Development of Management Accounting:
Recent Changes
In the 1980s, specialized management teams would take
over a company, slash direct costs by cutting jobs and selling produc- tive capacity, and dramatically improve financial performance.The com- pany’s stock price would rise and all would be jolly for a short while.
Then, as the company found it harder to maintain production and quality, market share eroded, the stock price went south, and the man- agers who had not successfully slipped away were either fired or jailed.
Some well-publicized instances of this phenomenon, such as Sunbeam, helped motivate a reexamination of what made a company successful and how to account for that success. More recently, exam- ples like Enron and WorldCom have shown the costly and shameful doom that waits for those who place their management emphasis solely on financial performance.
Companies are starting to edge away from this financial performance model. Management analysts have found that the most successful com- panies have a clear set of qualitative guiding beliefs, as opposed to set- ting quantitative goals such as annual growth targets or earnings per share.The enduring companies always seem to talk about financial and strategic objectives in the context of all the other things they expect to do well. Almost universal among these companies is the idea that profit is a natural byproduct of doing something well, not an end in itself.
• operation costing
• environmental/full cost accounting
• target costing
• transfer pricing
The goal of upper managers is to choose cost management approaches that are compatible with their culture and provide usable outcomes. Companies with significant cost distortion problems that leave millions of dollars on the table each year may benefit by working with an external resource that can per- form a high-level review of their management accounting sys- tem and recommend an affordable, customized solution.