JMAR Volume Three Fall 1991

Restoring the Relevance of Management Accounting

Toshiro Hiromoto Hitotsubashi University

Abstract: In our internationally competitive business environment, the path to take to restore the relevance of management accounting is sought by many. This article is based on the author's intensive field studies at successful Japanese manufacturing firms in several major industries, including automobiles. semiconductors, and consumer electronics. Four case descriptions are included. Today's innovative management accounting systems are designed to support continuous innovation, which is a new common theme of management accounting systems design. The four elements of the new theme are: A Behavior Influencing Focus, Market-Driven Management and A Dynamic and Team-Oriented Approach. In the past, management accounting has tended to focus on optimization with respect to a given set of parameters. Today's manufacturers, however, need a new system that would promote strategic management and focus on motivating employees to act strategically.

We are now in a period of innovation. A global innovation race is on.

Innovation existed and was important in other ages as well, but what is being seen today is "continuous innovation,"] and in our internationally competitive environment, corporate excellence depends a great deal on whether the process of innovation can be effectively managed. As a result. yesterday's management accounting has lost relevance. The management accounting being performed by top Japanese manufacturers today shows a new common focus or theme that represents a departure from what was observed in the past. They are showing us a path to take to restore the

'Continuous innovation is close to "kalzen" as described by lmai i 1986). Both are incremental or evolutionary processes, not revolutionary. And both are customer oriented. However. the Japanese term "katzen" implies that focus is on the factory activities. Continuous innovation is applied to all corporate activities.

I am indebted to Professor William L. Ferrara (Stetson University) Jor his helpful suggestions and comments. I also wish to thank Professor Em.erl.tus RoberlN. Anthony (Haruard Uniuersity), Professors Charles T. Horngren (StanJord Uniuersity), H. Thomas Johnson (Portland State UniuersityJ, Robert S. Kaplan (Harvard Uniuerstty), Kenneth A. Merchant (Uniuersity oj Southern California), Frances Moss (The Polytechnic oj Central London) and Ktyoshi Okamoto (Httotsubashl Unluerstty), and ProJessor Emeritus David Solomons (Untuersity oJPennsyluania) Jor many editorial and thought· fu1 comments on earlier uersions oJthis article. I also acknowledge the encouragement oj Prcfessors Jonathan B. Schttf (Fairleigh Dickinson Uniuersity) and John K. Shank (Dartmouth College). The usual caueat applies that they are not responsible in any way for remaining errors, inconsistencies, omissions, or Jaulty interpretations.

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Journal of Management Accounting Research, Fall 1991

relevance of management accounting. Their management accounting systems reinforce a top-to-bottom commitment to process and product innovation.

In today's rapidly changing business environment, innovation is the key to a company's survival and competitiveness, and the strategies that determine the direction of that Innovation have become crucial to corporate management. In Japan, management accountants work hard to link their management accounting systems to their companies' strategies for innovation. Faced with the need to simultaneously realize low cost, high quality, and timely delivery, they have been attempting more frequent use of nonfinancial measures. Cost allocation systems have been modified to promote automating factories, standardizing parts, and shortening lead time. And management accounting systems are also being redesigned so as to function better in an environment of restructuring and globalization. Moreover, given the importance of managing customer preferences, marketdriven management systems are also being designed. All these innovations center around a single theme: the desiqn. of measurement and control systemsfor continuous innovation.

This paper will look at the relevance of this new theme and four elements within it, following which will be some examples of innovative practices that have developed from it.

A REEXAMINATION OF THE PURPOSE AND ROLE OF MANAGEMENT ACCOUNTING

In order to restore the relevance of management accounting, some changes are needed. The aim of this section is not to oversimplify traditional management accounting and try to bash it entirely. Rather I do believe most of the basic concepts of traditional management accounting are still relevant and sound. I would like just to suggest that some perspectives of traditional accounting should be worth rethinking, e.g.,

1. Management accounting should play an "information for decisionmaking" role.

2. Management accounting should help obtain the optimal activities with regard to the current conditions.

Overemphasis on "Information for Decision-Maldng" Role

Management accounting has had not only a deciSion-making but also a behavioral focus. As Ferrara (1990) indicated, accounting research of a behavioral nature has long been observed in U.S. literature. Anthony [1957) and Bedford [1957) described a behavioral focus as early as 1957. Schiff and Lewin (1968) were also cognizant of behavioral factors. Horngren also has increasingly emphasized the motivational effects of the choices of accounting systems since the 1970s [Horngren, 1989).

However, it is a fact that there has been an overemphasis on a decisionmaking focus. As Homgren 11989, p. 23) noted, motivation was mentioned, but the emphasis was on which accounting quantifications would lead toward wiser economic decisions. Research tended to focus on accounting data for management decision making [Homgren, p. 22; Johnson and

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Kaplan, 1987, p. 162]. That accounting is a system for providing information useful for economic decisions has been the widespread view, and it still is. In fact, some are going so far as to say that western management accountants "are brought up to believe that numbers must above all be .rtght to enable managers to make informed decisions" [Financial Times of London, 11/ 18/88J. They want to provide information as inputs to decision-theoretical models and give correct answers and optimal solutions. They would stress the relevance and accuracy of accounting figures and pursue the conditional truth, trying to build an accounting system that permits measures and analyses of costs in relation to a particular decision.

Overemphasis on Constrained Optimization

Kaplan [1983l pointed out that management accountants normally assumed a stable corporate environment when considering a company's cost or managerial accounting system. Johnson [1990J discussed the shift in management accounting thinking from "taking constraints as given" to "moving constraints."

The basic managerial problem apparently assumed by conventional companies was to accept the current production environment as a given and implement policies that are optimal with respect to these existing conditions. In this kind of situation, cost accounting could contribute to management appropriately by following the consumption of resources precisely and computing the optimal policy with respect to a given set of parameters.

Scientific management also assumed known characteristics and a stable technology, as when manufacturers mass-produced and marketed mature standard products. The most prominent single element in scientific management was the task idea. It consisted very largely in preparing for and carrying out tasks based on engineering design, bills of material and timeand-motion study. Employees were expected just to succeed in doing their individual tasks right so that waste of material and time was kept to a minimum. Factory workers were considered to be just workers and operators, almost as attachments to machinery.

During the 19505 and '60s, a time when most of the world's industrial powers were rebuilding from the devastation of World War II, America enjoyed its Golden Age. U.S. manufacturers dominated their markets, controlling the major technologies in their products and processes. Moreover. they expected little change in the demands of their customers. As Prahalad and Hamel [1990J noted, a diversified firm could simply point its business units at particular products and admonish them to become world leaders.

THE ELEMENTS OF THE NEW THEME

Modern corporations are now operating in a totally different environment where static optimization is often irrelevant. Technological progress has become a matter of days and months in this age of continuous innovation. Such tremendous changes as more intense international competition, diversification of customer needs, shorter product life-cycles, and automation of factories are pervastve. Many firms' competitiveness does not

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Journal of Management Accounting Research, Fall 1991

derive from the price/performance attributes of existing products. Instead. competitiveness derives from an ability to build new quality products at lower cost and more timely than competitors. Firms that wish to be worldclass manufacturers must produce goods of substantially higher quality with greatly reduced inventory levels. shorter set-up times and production runs. and less uncertainty in the overall production process than presently exists. Rather than constrained optimization. the mission of today's management accounting is to assist continuous innovation and the creation of a competitive tomorrow.

All employees. including factory workers. are now required to "think while they work." A priority of management is to bring employees together in the promotion of innovative activities. Today's management accounting must build a constant awareness of strategic messages in every nook and cranny of the company. assuring that employees will be involved in unified. innovative activities and thus facilitating the enactment of corporate strategies. The following elements together constitute the new theme of management accounting:

1. A behavior influencing focus (linking organizational strategies to

action)

2. Market-driven management

3. A dynamic approach

4. A team-oriented approach

From Information for Decisions to A Behavior Influencing Focus

Accounting information is losing its prominence as data input for decision making in the age of innovation and strategies. The relevance of accounting information for decisions or choosing among alternative courses of action is declining. While managerial decisions always require a variety of input data of which accounting numbers are only a part. inputs to decisions other than accounting information are becoming more and more important. Moreover. management is less concerned with using information as a power base than encouraging interdepartmental brainstorming and communication.

At this point. management accountants need to change their focus in designing their systems from an information-for-decisions to a behaviorInfluencing focus.? The information-for-decisions approach was apparently stressed because management accountants wanted to recommend the optimal decision, even though the final choice always rested with the operating managers.

The primary concern of the behavior-influencing approach is to design a system to influence employees to do the desired things. This system does not necessarily try to provtde a true and accurate cost and an optimal solution. but allows employees to be creative and resourceful. For instance, discounted cash flow models could be used to help focus. identify and analyze critical input assumptions or project assumptions including possible scenarios and management responses and risks, rather than to solely

~he tnformatton-for-dectsions approach Is close to what Ijlri [19751 calls the decision approach. although he contrasts It with the accountability approach.

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assist managers' choices, as described in Hodder [19861. A CAM-I CMS project study group [From the Editors, p. 31, which visited some Japanese manufacturing finns in November 1986, reported that Japanese management accounting was usually less complex and less sophisticated, including the investment justification procedure. The reason why Japanese practice is often simple can be explained by the widespread emphasis on consensus .decisiorr making in Japan. That is, "the consensus formation process usually entails discussions among a number of managers from different areas and levels within the firm. In analyzing a project. such discussions tend to include a considerable amount of ... verbal scenario analysis" [Hodder, p. 191. For satisfactory participation in this process, managers must understand the analytical details, but that does not mean that the accounting system must become detailed and complex.

Integrating the Behavior Influencing Focus with Strategies

In the age of innovation, strategies give the direction of the innovation.

As Anthony [1988, p. 101 states, strategies are gutdellnes for deciding the appropriate actions for attaining the organization's goals. They may be a vision of what and where you want to be, and may be the scenario of the acttvtties that will lead to that vision.

Today's good and innovative management accounting systems are beIng used to encourage employees to behave in accordance with the organization's strategies. The systems are used to motivate employees to think and act strategically and to implement a chosen strategy.

Company A, for example, which will be described later, illustrates the case where a cost allocation system is used to Implement a policy of parts standardization. Manufacturer A faced a situation where it had to implement a cost reduction strategy in an environment of product diversification. The manufacturer Identified the number of part numbers as its key cost driver or strategic behavioral cost driver in order to better implement the chosen scenario: standardizing and reducing parts ~ simplifying the manufacturing process ~ decreasing manufacturing costs. The parts standardization was the focal point for implementing the cost reduction strategy in the environment of product diversification. (After this strategy was successfully in place, a different strategic need brought forth a different allocation scheme in Example E.)

From Technology-Driven to Market-Driven Management Systems

At this point. it is advisable to think of a finn as an interface between a technology and its market. leaving out other elements that have effects on corporate activity, such as culture, social practices, legal institutions and education systems. Business activities should be undertaken in harmony with both technological conditions and market needs.

In the tough economic situation after World War II, however, it was extremely difficult, virtually impossible, for Japanese manufacturers to survive and grow by operating at the optimal level computed taking the current marketing and technological conditions as given, as American companies did. In industries such as automobiles and consumer electronics, some companies began to look at the market first and follow a market-driven

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Journal oj Management Accounting Research, Fall 1991

strategy and as a result finally gained international competitiveness. Many other companies in Japan have learned from those experiences, and have adopted market-driven rather than technology-driven practices especially during critical times like oil crises and skyrocketing appreciation of the yen.

The practice followed by Japanese manufacturers is what I would call market-drtven'' management as contrasted with technology-driven management. It is a way of management thinking that gives priority to market or customer requirements over technological limitations. Above all things, attention should be paid to market trends and to what customers want and need.

With a market-driven philosophy, management tries to break the current technological limitations that restrict business activities, to satisfy market and customer needs. It stresses the continual improvement of technology rather than the optimal behavior under current technological conditions.

Now in the age of continuous innovation, even the U.S. manufacturers can no longer produce and market large volumes of standard products with a relatively stable market and technological environment. There has been a shift from a manufacturing environment where markets and technologies were stable to one where markets and technologies are unstable and change quickly. To implement market-driven management across the organization, top management repeatedly and emphatically should tell employees to stay close to their customers. And they must make structural changes in the organization to accomplish this goal. Those actions are not enough. however. Measurement and control systems must be designed to motivate market-driven behavior. These systems are in essence not push systems, but pull systems, as illustrated by Figure 1 where the market rather than technology drives performance goals.

Market-DrlvenCost Management Systems

Management accounting for motivating market -drtven behavior that is most typically conducted at Japanese companies is based upon target costing at the pre-production (or development and design) and production stages. Target cost systems at the development and design stage are often called genka kikaku. Under the target cost system. activities are controlled by using a target or a market-based allowable cost that has to be realized if the company is to be profitable in the competitive market. and comparing it with the actual or actually expected cost.

From Static to Dynamic Approaches

Management accountants have traditionally used the static approach to designing and using their management accounting systems. Emphasis was on performance for the individual time period. which is analogous to focus on improved efficiency in each department.

Today's management accounting systems must be dynamic. Performance has to be Judged over time without emphasis on individual time periods. Because innovation is a learning process, good management accounting today should help the organization to learn by stressing the progress of performance over time.

3Market driven or oriented is not marketing oriented. See Shapiro [19881.

Hiromoto

RESOURCES

TECHNOLOGY

RESOURCES

TECHNOLOGY

Figure 1 Market-Driven vs. Technology-Driven Cost Management Systems

TECHNOLOGY-DRIVEN SYSTEM

COST

MARKET-DRIVEN SYSTEM

or ALLOWABLE COST

PRODUCTS

MARKET

PRODUCTS

MARKET

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Journal oj Management Accounting Research, Fall 1991

Okamoto [1989] and Hall et al. [1991] observed measuring trends in actual performance, Hiromoto [19881 described the use of moving goals of performance. Moreover, my field study observations have revealed that one of the car manufacturers in Japan that installed the genka kikaku process carried out the decomposition of target (allowable) cost per car dynamically. That is, at earlier stages of development and design, the company assigned the target cost only roughly by sections such as engine design and chassis design. Then it started comparing the targets and actual results by each design group. Finally, targets were assigned for each part and for each parts manufacturer.

From Baton-Passing to Team-Oriented Approaches

Specialization of function, which is a heritage of F. W. Taylor, is surely necessary. but within reason. Today's corporations have been overspecialized. Excessive specialization has led to a situation where independent activities "pass the baton" to get the job done [Cole. 1988).

Many authorities. including Clark [1989). Kanter [19891. and Okamoto [19891. have come to notice the disadvantages of the baton-passing or sequential approach and argued for the team-oriented approach to production process and product development.

A team-oriented approach requires that management accountants should facllttate bringing together all knowledge and experience in the organization. For example. the significance of the use of nonfinancial measures to evaluate factory performance has been widely recognized. Notable here is that such measures should be used in combination with improvement programs implemented through small-group activities. In a large Japanese company. the controller assumes the responsibility of promoting such activities. The foolishness of baton passing is illustrated by a labor variance defined at the individual production cell level creating incentives for workers in each production cell to ignore the effect of their actions on other production cells [Foster and Horngren, p. 231.

The team-oriented approach requires that management accountants are always thinking of how they can contribute to solving management problems. A management accountant should be a member of the management team through close communication with all the people in the organization. Concerning this point. Ferrara [1987. p. 20] provides a succinct description: 'The management accountant does not live in a cloistered environment surrounded by books and reports and securing knowledge of the organization from the paperwork which crosses his or her desk. Even if . the accountant has theoretical training or even actual experience in all phases of operations. close contact must be maintained with all staff and operating units .... " Accounting is a human acttvtty, often entailing some delicate interpersonal communication.

Actually. however, the professional tends to be overspecialized." Johnson and Kaplan! 1988) observed that the design of accounting systems was

'Goetz [1939. p.152j. who had learned much from J. O. McKinsey. the author of Managerial Accounting [the University of Chicago Press, 1924). pointed out: "Accounting texts have been the product of public accountants or of teachers trained by public accountants .... Hardly believable, but demonstrably true. this [public accounting! point of view has so permeated the profession and the literature that private accountants and cost accountants are also forgetful of the managerial function of accounting."

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often the province of accountants who had little knowledge about their firm's markets and technologies. Now is the time to change. A management accountant as a member of the team is neither the distant evaluator of performance nor the gatekeeper of the organization's financial resources.

Some Examples

Example A

Factory A deals with almost a dozen product categories, including packaged air conditioners (its major product), chiller units. fan coils, and freezers. Each product category includes various models and types that. taken together. number about 3.000.

In the late 1970s, Factory A noticed that demand was growing for a wider variety of products. It produced 466 different items in 1977; this increased to 518 in 1978 and 580 In 1979. It was obvious that product diversification made manufacturmg processes extremely complicated and caused ballooned indirect manufacturing costs. Managers of the factory faced the problem of promoting diversification while preventing cost increases. After consideration. they concluded that dtversiftcatton increased the number of parts used and thus made the production process complicated. At the same time. they paid attention to standardization, which was so important a theme for the company that it held company meetings on standardization. As a result. the reduction and standardization of parts used became an immediate manufacturing strategy for the factory.

Then, they looked into the next problem. determining the appropriate measurement system for implementing the strategy. As discussed in the section on "team-oriented approaches." management accountants of the factory were always thinking of how they could contribute to solving management problems.

The question was raised about how product designers could be motivated to cut the number of parts and work toward use of standard parts. The company's product designers were expected to work with the idea that their department was a profit-making part ofthe company. Therefore. they worked on designs to give the products better function at lower cost. After discussion. management arrived at an agreement: to find a method to allocate manufacturing overhead so that product costs increase with the number of parts used and with the number of non-standard parts used.

As described below. design and testing costs were allocated to products according to a new method called "standardization-based allocation," which was set up to motivate the new strategy. The people concerned agreed that there was a cause-and-effect relationship between design and testing costs and the number and commonality of parts used.

Under the standardization-based allocation system. design and testing costs were first allocated to each product category based on the number of the employees engaged in the category. Then, the total weighted number of parts used [1WN) was computed by product category using this formula: 5

5'fhe weighted val ues, 10, 5, and 1 were derived from an engineering study so that people would accept them as fair. These figures may be inexact, bu t not capricious [Anthony, 1983, pp. 126- 7J. The reader may imagine intense arguments about whether it should be 10,9, or 8, rather than an understanding of the purpose of the calculation. Note that the purpose ts to calculate an Influencing cost Instead of the "true" cost.

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Journal of Management Accounting Research. Fall 1991

1WN

= Li (Ni x WNi)

= Li {Ni x (UPI x 10 + CPAi x 5 + CPBi x I)}

where,

NI = production quantity of model i

WNi = weighted number of parts used in modeli

UPt = number of unique parts used in model i

CPAi = number of common parts among products in the same category used in model i

= number of common parts among products in different categories used in model i

Suppose a model in product category X uses 100 parts. Thirty ofthem are unique, 50 are shared with other models in X, and 20 are conunon parts also used in other models in different categories from X. Then, WN is 570 for the product.

The budgeted burden rate was obtained by dividing budgeted design and testing costs by 1WN for each product category, and revised every Six months. The costs were allocated to individual products at the charge rate multiplied by WN.

The new system had a substantial effect. When I asked about improvement, they gave me the following measures. They obviously stressed the progress of performance over time. The standardizatton rate (number of common parts / number of total parts) for all products was 60.5 percent in the first half of 1978, grew to 62.2 percent in the second half, and to 63.8 percent in the first half of 1979. The same figure for newly developed products was 11 percent in the first half and 20 percent in the second half of 1978, rising to 22 percent in the first half of 1979. The rate increased steadily despite increasing product variety, and reached almost 68 percent as of the second half of 1987 for all products.

CPBi

Example B

The above-mentioned factory, Factory A. faced a new problem in the late 1980s in the form of a substantial change in the market for the factory's major product, packaged air conditioners. The market for 1.5 to 3.0 hp air conditioners began to grow rapidly and was recognized as promising. It became strategically important to Invest as many resources as possible in that particular product group. The problem facing the factory was that 5 hp and 2 hp air conditioners used the same number of parts, but the ratio of retail prices was 100 to 60 or 70. Since the standardization-based allocation system allocated the same costs to the two products, it determined that the 2 hp product, which the factory should have been emphasizing. was less profitable. While it became necessary to encourage designers to work on this type of product much more than before, the allocation system of Example A became a big obstacle to the strategy.

On the other hand, the designers had learned the value of conunon parts so that they now naturally design products with common parts. Moreover, computer-aided design had been Introduced during the last few years, which promoted the use of standard parts.

As a result, Factory A decided to abolish its standardization-based cost allocation system and introduce a new system starting from October 1988.

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Under the new system, design and testing costs were first allocated (as before) to each product category based on the number of employees, and then allocated to each model in a category based on sales expressed in yen." This encouraged the designers to be much more interested in the 2 hp product because the 2 hp product became more profitable under this method.

Example C

Factory C introduced a flexible manufacturing system (FMS) into a manufacturing department in 1984, based on the strategic judgment that as far as possible. in-company production of parts was preferable for cost reduction, improved quality, and shortening the delivery time as well as secure employment. However. it was not easy. Because the reported conversion cost of the newly-established FMS department was ahnost twice as high as that of outside manufacturers. it was more economical to order from outside manufacturers.

The problem faced by Factory C was that if decisions were made ustng available cost information, then the long-term manufacturing strategy for internal production by FMS could not be realized. Various alternative measures of product cost were examined, including the proposal to count the variable costs only or count only direct costs. However. agreement could not be reached about this sort of partial costing. For senior management, product cost had to be total absorption cost. The result was it seemed impossible to carry out an internal production strategy while maintaining total absorption costing.

Managers of the factory succeeded in solving the problem by changing their way of thinking. The business environment was becoming tncreasmgly competitive internationally due to such factors as the advancement of newly industrialized economies and technological innovation had also accelerated. To survive in such a competitive environment, what needed to be asked was not "whether our current activities were economical" but "what to do in order to carry out economical activities tomorrow." If the current technologicallevel was not economically viable, then technological innovations were required to make it economically viable. Accordingly, management accountants of the factory changed their focus in designing their cost system from an information-for-decisions to a behavior-influencing focus.

As a result. Factory C came up with an innovative cost accounting system in 1988. The factory revised its method of charging conversion costs to the product. Under the new system. the conversion cost charged to each product or Job order was not based on its own currently accrued cost, but based on the cost artsmg from outside manufacturers. as illustrated below. Notable was that internal conversion costs charged were made equivalent to outside manufacturing cost.

For example, suppose the company has some work that takes 120 hours for outside suppliers to process, but only 100 hours for the company thanks to the FMS. The outside order charge is $25 per hour, while the conversion

6Sales in yen and the number of employees are often used allocation bases, since they are considered equitable. Hiromoto [1990. p. 18] lIIustrates an example of how influencing strategies can be incorporated in the allocation process on the basis of sales.

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Journal of Management Accounting Research. Fall 1991

cost is $50 per hour. Assuming the company does 24 hours of external work in 20 hours and contracts 96 hours outside of the 120 total hours, the product costs for in-house and outside work are calculated as follows according to the new system:

Outside order

materials cost

cost of outside work total

In-house processing materials

cost of outside work conversion cost total

$25 x 120 hrs

$25 x 96 hrs $30· x 20 hrs

$2,000 3.000 5.000

$2.000 2.400 600 5.000

·Equlvalent value of in-house processing or $25 (120 hours/ 100 hours) = $30 per hour.

The above can be compared to the old system which is as follows:

Outside order

materials

cost of outside work total

In-house processing materials

cost of outside work conversion cost total

$25 x 120 hrs

$25 x 96 hrs $50x 20 hrs

$2.000 3,000 5.000

$2,000 2.400 1,000 5.400

The calculated product cost was no longer higher when done in-house than outside ($5,000 in both cases). Since the difference between the actual conversion cost and the charged cost ($1,000 - 600 or $400) was determined and highlighted as a significant variable. people were motivated to make all efforts to reduce that difference so that they could become competitive manufacturers. Note that the new system, which is in essence a form of target costing, permits the manufacturtng strategy for internal production without breaking the company's cost recovery policy and leads to the longterm competitiveness of the company whose managers are no longer concerned about obtaining the optimal activities with regard to the current conditions.

Example D

Factory D was operating near full capacity in an extremely competitive Situation. But it was not making satisfactory profits. Managers tried various methods to improve performance. They measured actual and standard processing hours by process more often than before and analyzed the standard-cost variances more closely. Nonetheless, they could not get satisfactory results. They began to think about whether there was something wrong with their way of thinking.

Soon thereafter, the managers of Factory D turned to the new ideas of just-in-time and optimized production technology characterized by pro-

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ducmg products as needed and cutting lead time. They began to understand that improved efficiency in each dMsion did not necessarUy add up to greater efficiency for the factory as a whole. They knew they had wrongly believed that everything was fine if only high capacity utilization was secured.

Management started a change by explaining its new rnanufacturtng strategy to all the people in the organization. Putting a strategy into practice required the cooperation of people in all departments.

Unfortunately, the sales department had always anticipated future possible orders and included them as well as actual orders in their information system because they feared delays in delivertes to customers. This practice obviously went against the new strategy of producing the actually required product in the required quantity. The thinking and action of the sales people had to be changed. As a starter the input code for "anticipated sales" in the sales department computer was eliminated.

In 1984, Factory D added two new performance measures, lead time and inventory turnover, and gave priority to them. In addition, it decided not to report actual processing time by division, even though modern computerization of factory operations drastically reduced the cost of detailed measurement of actual processing time. Efficiency in each division did not necessarily lead to efficiency of the whole. Reporting the actual processing time of each division encouraged actions focused on the efficiency of the division at the cost of efficiency for the overall operation, and discouraged necessary cooperation among divisions and employees.

A remarkable improvement in performance was made. Turnover days were reduced from 102 days in 1985 to 30 days in 1988. Production lead time was reduced from 108 days in 1984 to 52 days in 1988.

Allocated manufacturing overhead used to be calculated by multiplying the predetermined division rate by the actual processing time. But. since divisional actual time became unavailable, it was replaced by the division standard time, which was the sum of each work station's standard processing time.

At this point, the cost allocation system was not yet totally linked to the factory's new production strategy. In 1989, however, the new cost allocation system was devised and introduced. Under the new system. allocated costs were calculated by multiplying the division rate by the total standard "elapsed time" of the divisions.

The new system worked as follows. Assume three work stations, A, B. and C. The standard processing time of each work station is, respectively, 2 minutes. 10 minutes and 3 minutes. Then. the total standard elapsed time was computed to be 10 x 3, or 30 minutes, while the total division standard time is 15 minutes. The factory reported that the new cost system began to influence employees' behavior so that cost reduction activities were concentrated on bottleneck or constraining work stations.

CONCLUDING REMARKS

The business environment is not entirely chaotic, and at the same time it is not entirely definitive. Business activities are carried out in a mixture of optimization and innovation. However, yesterday's management accounting lost its balance. Yesterday's management accounting overem-

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Journal oj Management Accounting Research. Fall 1991

phasized supporting static optimization and helping managers plan and control optimal behavior. The questions to be asked now are "For what purpose does management accounting exist today?" and 'Which role should management accounting emphasize today. 'information for decisions' or 'behavior Influencing'?"

In the old, stable business environment. the keys to competitiveness were the good machines and good decisions concerning their use. The key resource to becoming an excellent company was material. and therefore the primary concern of management accountants was to see that materials and existing plant and equipment was used in an optimal manner and that the employees worked in a way that those facilities were operated most efficiently. Thus. management accounting used to be recognized as "accounting to facilitate a superior's optimal decisions." However, today when continuous innovation is the source of global competitiveness. the key resource to manufacturing excellence is creative people. Here, management accounting should be recognized as "accounting for getting people to do the desired jobs well."

Management accounting for continuous innovation presupposes an awareness of the fact that the employees of the organization are the ultimate source of improvements in quality and productivity. Its success depends on the quality and ability of employees. Top management must recognize this and utilize the management accounting system to motivate all employees to move toward the strategies developed and endorsed by top management. Thus, the most basic element of today's management accounting must be a behavioral focus.

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