Trends in Management Accounting

in the Asian Pacific Region

ZABIHOLLAH ~ Z A E E , JOSEPH Z. SZENDI, CONNIE SHUM,

AND ROBERT C. ELMORE*

INTRODUCTION

The usefulness of the traditionalmanagement accounting information system has been challenged
by a changing economic environment coupled with increased global competition and the emergence
of new manufacturing technologies. The past five years have been characterized by the criticism
and reexamination of management accounting practices and techniques. Critics view management
accounting as contributing to the loss of competitiveness of the United States in the global
economy. Much of the criticism has led to a strong impetus in adopting "cutting edge" management
accounting techniques by manufacturers as well as academics. Numerous Asian countries emulate
the American business school paradigm and use a very similar curricular approach to the teaching
of management accounting, however, little has been said about the management accounting
practices utilized in some of the developing economies of the Asian-Pacific region. Additionally,
few empirical studies provide insights into management accounting education or practices in those
countries. Thus, the purpose of this study is to examine trends in the adoption of new management
accounting techniques and practices by Asian-Pacific manufacturing firms.

BACKGROUND

Over the last decade, critics of management accounting have questioned the relevancy of many
traditional techniques and practices. For example, Goldratt [1983] contended that traditional
management accounting undermines production and is the number one enemy of productivity.
Cooper and Kaplan [1988] and Kaplan [1988] have argued that the traditionalaccounting techniques
may no longer be valid as the production process changes. These techniques fail to provide
relevant, useful, and timely information about processing activities that management needs for
planning and control purposes. Traditional management accounting systems are often considered
incompatible with modem production systems [Jayson, 1987; Umble and Srikanth, 1990]. Also,
traditional systems have typically used direct labor as an allocation base, often inappropriately
[Shank and Govindarajan, 1988].
One result of the changing economic environment has been the emergence in the literature of
cost management. Cost management as an integrative area " . . . combines elements from three
other fields: management accounting, production, and strategic planning [Cooper, p. xiii]." This
broadening of the traditional management accounting environment involves emphasis on activity
based costing, cost management systems, advanced manufacturing technologies, cost planning and
control, quality costs, performance measurement, and strategic cost management [Brinker, 1990].

*Middle Tennessee State University, Texas A & M University at Corpus Christi, Pittsburg State
University, and Tennessee Technological University.

149
150 INTERNATIONAL ADVANCES IN ECONOMIC RESEARCH

An important aspect of cost management is the integration of accounting data in the strategic
planning process. Strategic cost management focuses upon the role of developing and implementing
internal accounting information useful in strategic planning. A cost management system must
provide financial and nonfinancial data to support the strategy of the organization, and customer
demands of quality, flexibility, service, and cost. Shank [1989, p. 50] defines strategic cost
management as the blending of three underlying themes: value chain analysis; strategic positioning
analysis; and cost driver analysis [Shank, 1989, p. 50].
Underlying the concept of strategic cost management is value chain analysis. The value chain
has been defined as " . . . the linked set of value-creating activities all the way from basic raw
material sources for component suppliers through the ultimate end-use product delivered into the
final consumer's hands [Shank, 1989, p. 50]." The value chain broadens the traditional internal
focus of managerial accounting while focusing on exploiting linkages with customers and suppliers.
Creating product value encompasses quality, price, service, and other relevant factors. Knowledge
of the cost structure and value chain of the organization allows examination of the major cost
elements of each value added activity.
Another underlying theme of strategic cost analysis is cost driver analysis [Shank, 1989]. The
emphasis is on determining the causes of costs. Establishing cause and effect relationships of costs
with their cost drivers provides a basis for elimination or reduction of non-value-added costs, while
also providing a basis for the integration of cost information into strategic planning. Cost driver
analysis can also be expanded to other activities within the organization, thereby moving away from
the limited traditional cost accounting focus of inventory valuation to the broader based cost
management.
Numerous studies have examined the content of the management/cost accounting curriculum in
the United States and Asia (for example, Lander and Reinstein; Bromwich and Wang; Anyane-
Ntow) to determine if educators are responding to the needs of practitioners. Generally these
studies have focused on the views of accounting practitioners and/or educators concerning the
importance of selected management accounting topics, or desirable knowledge and skills that should
be included in the Common Body of Knowledge (CBOK) for management accounting. The results
of this study provide information for educators and practitioners, in both the United States and
Asia, by examining the importance and use of various management accounting practices and
techniques.

METHODOLOGY

The purpose of this study is to examine trends in the adoption of new management accounting
techniques and practices by manufacturing firms in the Asian Pacific rim region. The study
involved mailing a questionnaire (in both English and Chinese to those countries with large Chinese
populations) to a sample of 550 manufacturing firms in the major developing and developed
economies of the Asian Pacific Region. The practices and techniques used in the survey were taken
from topical coverage at recent professional conferences, and domestic and international practitioner
and academic accounting journals. The questionnaire consisted of two pages and asked respondents
about general demographic data, as well as the perceived importance of both traditional and
"cutting edge" management accounting techniques and practices. The questionnaire also asked
respondents to indicate whether various innovative practices and techniques were being currently
used in their companies, and if they were not being currently used, would they be used in the near
future. At the time of this writing, completed questionnaires were still being received from the
respondents and a total of 41 usable responses, representing a 7.4 percent response ratio, had been
received.
 MAY 1995, VOL. 1, NO. 2 151

RESULTS

Cost Allocation

Table 1 provides the responses from questions regarding cost allocation methods used.
Respondents were also asked about their cost structures and their firm's degree of automa-
tion.
A major criticism of traditional cost accounting systems has been the use of direct labor as a
base for allocation of overhead, which may result in mis-statement of the product's cost [See, for
example, Cooper and Kaplan, 1988; Shank and Govindarajan, 1988]. Allocationof overhead should
result in each product being charged for the amount of resources it consumes.
Question 1.1 of Table 1 shows that respondents reported a mean value of their total
manufacturing costs of 15.6 percent for direct labor, 22.5 percent for factory overhead, and 55.6
percent for direct materials. Question 1.2 indicates that only 9.8 percent of the respondents used
direct labor as the allocation base most frequently used at their firm. This suggests that, unlike
numerous American firms, few Asian manufacturers use an allocation base that represents only a
small percentage of their total manufacturing costs. The results also indicate a trend away from use
of a single allocation base. Forty-seven percent of the respondents indicated the use of multiple cost
drivers and ABC. However, the use of production volume by 22 percent of the respondents in not
encouraging with regards to the adoption of the newly advocated cost management techniques. The
majority of the respondents considered themselves as labor intensive with only a low percent of
their total manufacturing costs fixed. Questions 1.3 and 1.4 indicate that 39 percent of the
respondents considered their firms to be very or somewhat automated while 53.7 percent reported
that less than 40 percent of their total manufacturing costs are fixed. Once again, this is
significantly in contrast with the findings of a recent survey of American manufacturing firms
(Szendi and Elmore, 1993).

Importance of Selected Accounting Practices and Techniques

Respondents were asked the degree of importance their firm placed on various accounting
practices and techniques. The results are summarized in Table 2.
The questions in Table 2 asked respondents to demonstrate the level of importance they placed
upon accounting information in various major management activities. A fwe-point scale was used
providing possible responses from "5" indicating "extremely important," to "1" indicating "not
important."
Questions 2.1 and 2.2 ask the degree of importance that cost/managerial accounting information
provides in product development and design. The majority of respondents (76 percent) indicated
that managerial/cost information is important in the development of products. Cost accounting
information is also considered important (78 percent) in the design of components and parts. Table
3 indicates that respondents also find managerial/cost information important in sourcing (63.4
percent), quality and cost improvement (85.4 percent), pricing (83.0 percent), competitive cost
analysis (78.1 percent), inventory management decisions (87.8 percent), and manufacturing process
alternatives (78.0). The respondents, therefore, believed that the managerial/cost information that
they are preparing is useful in a wide variety of management activities.

Changes in Management Accounting Systems

Table 3 examines current trends in the areas of activity based costing, and production and
inventory controls. This section of the study examines whether there is evidence among Asian
152 INTERNATIONAL ADVANCES IN ECONOMIC ~ S E A R C H

manufacturers of movement toward the innovative managerial accounting techniques and procedures
that are being discussed in current literature and at conferences.
The first section of Table 3 indicates a strong movement toward Activity Based Costing (ABC).
Within the next two years 66 percent of the respondents expect to use ABC for pricing, 59 percent
for performance measurement, 63 percent budgeting, and 54 percent for strategic planning. Use
of ABC in these areas currently ranges from 27 percent to 44 percent. These results indicate a
strong trend toward implementation of ABC by these respondents, and are nearly twice the rate
found by Szendi and Elmore, among American manufacturers.
The second section of Table 3 looked at changes in production and inventory control systems.
Computer integrated Manufacturing (CIM) was indicated as a method currently in use by 31.7
percent of the Asian manufacturers, whole another 36.6 percent are planning to adopt the technique
within the next two years. Flexible manufacturing systems were in use by 56.1 percent of the
respondents with 14.6 percent planning to adopt them. The trend toward JIT is also expected to
continue as 29.3 percent of the respondents currently use the method while an additional 31.7
percent anticipate its use within the next two years. Nearly half of the respondents (43.9 percent)
currently use MRP systems with another 26.8 percent anticipating a change to MRP systems within
the next two years.Also, 22 percent of the manufacturers indicated the use of synchronous
manufacturing at present, with another 14.4 indicating its use in the near future.

TABLE 1
Cost Allocation

1.1 What is the approximate percentage breakdown of product costs in your firm?
Mean
Direct Materials 55.6 percent
Direct Labor 15.6 percent
Factory Overhead 22.5 percent
100.0 percent

1.2 Which of the following cost drivers is~are used most commonly at your firm for overhead
allocation ?
Percent of
Cost Driver Respondents
Direct Labor 9.8 percent
Direct Materials 14.6 percent
Machine Hours 2.4 percent
Activity based drivers 12.2 percent
Product volume 22.0 percent
Multiple Cost Drivers 34.1 percent
Other 4.9 percent
Total 100.0 percent
 MAY 1995, VOL. 1, NO. 2 153

1.3 How would you classify your firm's productive processes ?

Percent of
Respondents
Highly automated 12.2 percent
Moderately automated 26.8 percent
Highly labor intensive 43.9 percent
Moderately labor intensive 17.1 percent
Total 100.0 percent

1.4 What is your firm's cost structure ?

Percent of
Respondents
80-100 percent fixed 4.9 percent
60-79 percent fixed 4.9 percent
40-59 percent fixed 29.3 percent
20-39 percent fixed 24.4 percent
Less than 20 percent fixed 29.3 percent
Don't know 7.3 percent
Total 100.0 percent

TABLE 2
Importance of Selected Accounting Concepts and Techniques

What degree of importance does your firm place on Cost~Managerial Accounting information in the
following situations ?
Extremely Not
Important Important
(5) (4) (3) (2) (1)

2.1 Performance evaluation 26.8 31.7 17.7 12.2 12.2

2.2 Product development 9.8 39.0 29.3 12.2 9.8
2.3 Component and piece 0.0 17.1 43.9 19.5 19.5
part design decisions
2.4 Sourcing decisions 7.3 53.7 2.4 24.4 12.2
2.5 Quality and cost 39.0 41.5 4.9 7.3 7.3
improvement analysis
2.6 Pricing analysis 22.0 43.9 17.1 7.3 9.8
2.7 Competitive cost 22.0 39.0 17.1 9.8 12.2
analysis
2.8 Inventory 19.5 56.1 12.2 9.8 2.4
management decisions
2.9 Manufacturing 14.6 31.7 31.7 7.3 14.6
process alternatives
154 INTERNATIONAL ADVANCES IN ECONOMIC RESEARCH

TABLE 3
Changes In Management Accounting Systems

Percent of Percent of
Respondents Respondents
Currently Planning to
Using Use Within
Two Years

3.1 ACTIVITY BASED COSTING

Use of ABC for pricing 43.9 22.0

Use of ABC in perform- 39.0 19.5
ance measurement
Use of ABC cost drivers 43.9 19.5
in budgeting
Use of ABC for 26.8 26.8
strategic planning

3.2 PRODUCTION AND INVENTORY CONTROL TECHNIQUES USED

Computer-Integrated 31.7 36.6

Manufacturing (CIM)
Flexible Manufacturing Systems (FMS) 56.1 14.6
Just-in-Time (JIT) 29.3 31.7
Materials Requirement Planning (MRP) 43.9 26.8
Synchronous Manufacturing 22.0 14.6

SUMMARY AND CONCLUSIONS

The results of this study indicate that the manufacturing firms in Asia responding to this
questionnaire are adopting some of the changes in advocated in the "new" managerial accounting.
Respondents see increasingly important roles in their organizations for activity based costing,
evaluation of value added activities, quality control, and production and inventory control systems,
while retaining some of the traditional techniques appropriate for their more labor oriented
manufacturing environment. The integration of accounting controls with strategic measures and the
use of non-financial performance measures will become more important in the future. Respondents
also considered their cost/managerial information to be useful in a wide variety of management
decisions.
Managerial accounting techniques and practices have changed in response to the challenges
of global competition, international markets, technological advances, and complexity of business.
Adoption of these innovations by Asian manufacturers suggest a changing role for the
managerial/cost accountant. The future management accountant will need to be knowledgeable of
production, quality control, marketing, and management strategy.
 MAY 1995, VOL. 1, NO. 2 155

The results also indicate a broadening of management accounting and a trend toward the
integration of management accounting information with strategic planning, suggesting the
emergence of the integrative area of cost management. This evidence of changes in the practice of
management accounting in Asia will also have significant implications for American universities
and manufactures regarding the common body of knowledge required for domestic and international
management accounting and the future direction of management accounting education.

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