Business Strategy Strategic Role of Acco

ASIA-PACIFIC
MANAGEMENT
ACCOUNTING
JOURNAL
Volume 7 Issue 1
June 2012
ASIA-PACIFIC.indd 1 3/13/2013 4:50:20 PM

Volume 7 Issue 1 APMAJ June 2012
CONTENTS
1 An Exploratory Study of Balanced Scorecard Practices: Preliminary

Evidence from Thailand
Wasatorn Shutibhinyo
29 Balanced Scorecard Implementation within a Malaysian Government-

Linked Company
Norlaila Md Zin
SuzanaSulaiman
Aliza Ramli
Anuar Nawawi
59 Business Strategy, Strategic Role of Accountant, Strategic

Management Accounting and their Links to Firm Performance:
An Exploratory Study of Manufacturing Companies in Malaysia
Tan Ah Lay
Ruzita Jusoh
95 Comparative Studies of Cost Accounting Practices in Japan and

Germany
Shinsuke WADA
Matthias Moeschler
Peter Kajüter
115 Intricacies of Overhead Cost Allocations and Distortion in Costing:

A Synthesis of the Literature
Bülend Terzioglu
141 An Experimental Investigation on the Effect of Feedback Control

Policy and Need for Achievement on Subordinates’ Budgetary
Slack Creation
Vincent K. Chong
Irdam Ferdiansah

AN ExplOrATOry STudy Of
BAlANCEd SCOrECArd prACTICES:
prElImINAry EvIdENCE frOm
ThAIlANd
Wasatorn Shutibhinyo
Chulalongkorn Business School
Chulalongkorn University
Abstract
This paper develops a framework for Balanced Scorecard (BSC) stage

classification by considering the BSC attributes embedded in firm’s
performance measurement system. Employing this framework to explore
the BSC application among Thai listed companies reveals that based
on survey data, 69% are classiied as BSC users. Compared to the self-
assessed responses about BSC application, 38% misclassify themselves.
This supports the different interpretations of BSC expressed in prior studies
and highlights the importance of proper classiication of BSC application
before performing any determinant or consequence tests. The developed
BSC framework can be applied to future research as researchers should
consider BSC attributes, not irms’ self assessed responses about BSC
application, in order to mitigate the dissimilar interpretations of BSC
concept. Additionally, exploring the BSC practices among Thai listed irms
in all industries complements previous studies on BSC application mostly
performed in speciic industries in US and Europe.
Introduction
Nowadays, business environments have become increasingly competitive

and dynamic. Executives should focus on business strategies and must
have tools which provide useful information, both in terms of accounting
data and related information regarding strategy and operations, in order
to support their strategic decisions. This raises the important role of

Asia-Paciic Management Accounting Journal, Volume 7 Issue 1
accounting department and management accountants to provide such

relevant information and to design the strategic performance measurement
system to serve such need.
Balanced Scorecard (BSC) devised by Kaplan and Norton in 1992 is one of

the most important developments in management accounting, particularly
in strategic planning and control (Atkinson, et al., 1997). It relates to the
reform of the performance measurement system, one of the responsibilities
of accountants.
Since its introduction and anecdotal cases of success, BSC has attracted
considerable interest worldwide. The BSC adoption rates are increasing
in many countries, including Thailand. Many studies have been conducted
aiming to explore the BSC diffusion, to examine factors inluencing
BSC adoption or implementation, and to investigate the effects of BSC
application. Unfortunately, prior studies provide mixed results regarding
the determinants or consequences of BSC application. This is possibly due
to the misunderstanding of the BSC concept and the ambiguous stages of
BSC application.
As Kaplan (2010: 25) clearly stated that “Many academics, consultants,

and managers… continues to think erroneously of the scorecard as a
performance measurement system only. Their knowledge and acquaintance
with the scorecard is probably based only on reading the original 1992 HBR
article or the irst half of the initial Balanced Scorecard book”. Thus, the
misunderstanding of BSC concept deinitely affects the research results,
especially when the studies take irms’ responses about the BSC usage as
given without providing a clear deinition of BSC application. In other
words, irms’ self-assessed responses about the BSC application are likely
to bias the research results in the sense that irms may understand differently
the BSC concept, resulting in dissimilar criteria used to judge to which stage
of BSC application they belong.
Several studies use “Adoption” and “Implementation” interchangeably

despite different meanings. In the two words following Roger (2003),
“adoption” is a decision to make full use of an innovation as the best
course of action available; “implementation” is all of the events, actions,
and decisions involved in putting an innovation into use. Hence, BSC-

An Exploratory Study of Balanced Scorecard Practices
adoption irm is one at the stage of choosing to follow BSC idea, while
BSC-implementation irm (or BSC user) is one at the stage of carrying out
a practical means for accomplishing BSC usage. As a result, the stages of
BSC application1 cover Non-adoption, Adoption, and Implementation.
As BSC incorporates four BSC attributes (i.e., Translating strategy into

operational terms, Aligning the organizational units to the strategy,
Communicating strategy to employees, and Providing feedback and
learning). It is not unusual that BSC irms have mixed combinations of BSC
attributes. Therefore, some irms are partially-implemented BSC irms, while
some are fully-implemented. This, perhaps, is one of the critical reasons
for the mixed results of previous studies investigating the determinants and
consequences of BSC application.
Overall, this raises the necessity of accurate determination of BSC

application at the beginning of any BSC research projects. Researchers
should care about the elements of BSC in order to properly identify the
stages of BSC application, which consequently allows the researchers to
appropriately investigate the extent of BSC usage, its determinants and
consequences (Burkert, Davila and Oyon, 2010).
To date, little research has been published on strategic performance

measurement systems, particularly BSC, in the context of Thailand. Most
of Thai irms commonly use the performance measurement systems, but are
not required to apply Balanced Scorecard. Thus, it is expected that certain
companies possibly apply some or all elements of BSC either knowingly
or unknowingly. Therefore, irms were asked about the characteristics of
their performance measurement systems and management processes to
relect the BSC attributes placed in performance measurement systems.
These embedded BSC attributes are consequently used for categorizing
the stages of BSC application.
Therefore, the objectives of this study are to develop a framework of BSC

application and to employ such framework to identify the BSC attributes
applied by survey-responding irms, which are then used for classifying the
stages of BSC application among those companies.
1
Given that the word “application” will be used to denote both “adoption” and
“implementation” in this paper.

This paper contributes to the body of knowledge in the area of BSC by

proposing conceptionalization and operationalization of BSC framework
which can be further used by both academics and practitioners. This paper
also answers an interesting question about the rate of BSC application
among Thai listed irms in order to complement the prior studies mostly
conducted in the US and Europe.
This paper is divided into ive sections. The irst section is the introduction
discussed earlier. The second section presents a brief literature review,
followed by the research methodology explaining data collection and survey
instrument. The fourth section shows the developed BSC framework, the
results of the survey, and additional tests. The last section presents the
conclusions and the discussion on contribution, limitations and suggestions
for the future research.
literature review
This section briely discusses the conceptual foundation of Balanced

Scorecard and the stages of Balanced scorecard application.
The Balanced Scorecard and its Attributes
Kaplan and Norton had originally devised the Balanced Scorecard as the
multi-dimensional performance measurement system with a collection of
inancial and noninancial measures (Kaplan and Norton, 1992). BSC is
now transformed into a strategic performance measurement system as it is
a strategic performance measurement system containing a set of integrated
inancial and noninancial performance measures that are explicitly linked
to a irm’s strategy. The cause-and-effect linkages among these measures
can describe an organization’s value-creating processes. It is used to
align business activities to the vision and strategy of the organization,
improve internal and external communications, and monitor organizational
performance against strategic goals. (Kaplan and Norton, 1996; 2001; 2008).
The aforementioned deinition of BSC highlights four BSC attributes: (1)

Translating strategy into operational terms, (2) Aligning the organizational
units to the strategy, (3) Communicating strategy to employees, and (4)

Providing feedback and learning. The explanations for each attribute are
as follows:
Attribute 1: Translating Strategy into Operation Terms (Strategy)
This is a very crucial feature of BSC since it is a foundation of BSC and

the other BSC attributes (i.e., Alignment, Communication, and Feedback)
described later. With this characteristic, a irm can claim that it has
implemented BSC. This key attribute includes all of the following sub-
attributes:
(1) Multiple perspectives: Grouping the measures into multiple dimensions

allows a manager to look at the business concerning interrelated
important perspectives. This also implies that the measures consist
of both inancial and noninancial (i.e., operational) ones along such
multiple perspectives.
(2) Measures derived from strategy: Measures should be linked to the

organization’s strategy so that a irm’s strategy can be inferred by
looking at its key measures. Hence, ‘creating a Balanced Scorecard
should not start with selecting metrics’ (Kaplan, 2010, p.18), but with
developing the strategy. This underscores the signiicance of well-
deined strategy as a basis for deriving strategic measures.
(3) Cause-and-effect relationships (or Causal links): The linkages among

the strategic objectives or measures within and across perspectives can
tell the business strategy or illustrate the value-creation process. This
sub-attribute also makes the other three attributes work out easily.
All three aspects of translating strategy into operation terms help clarify
and gain the consensus about the irm’s strategy, while providing a base
for the other three attributes.
Attribute 2: Aligning the Organizational Units to the Strategy

(Alignment)
As an organization consists of various business units and support

departments, it is important to align business units’ and functional units’

strategies to the corporate-level strategy in order to generate the corporate

synergy, which causes a collection of business units to create more value
than if each unit operates autonomously.
Attribute 3: Communicating Strategy to Employees

(Communication)
The CEOs and executives cannot run the business by themselves. When
the objectives or measures are consistent with the overall strategy,
communicating and educating ensures that employees understand a irm’s
strategy and scorecard. This intrinsically and extrinsically motivates
employees to perform their work in the ways that contribute to success of
the strategy.
Attribute 4: Providing Feedback and Learning (Feedback)
Organizations should link strategy to the budgeting process by setting

performance targets for the strategic measures and by screening the strategic
initiatives for achieving such targets. In addition, to keep BSC in tune with
external environment, a irm needs to consider whether or not its strategy is
appropriate. This raises the importance of the feedback and learning process
that enables the strategic reinements or makes strategy a continual process.
According to previous BSC research, most studies have not been concerned
about all the above-mentioned BSC attributes. Some prior studies have
focused only on sub-attribute(s) or a single attribute of BSC (e.g., Hoques
and James, 2000; McWhorton, 2001; Gosselin, 2005; Abernethy, Horne,
Lillis, Malina and Selto, 2005; Jusoh, 2007), while some have done on the
various combinations of the BSC features (e.g., Lipe and Salterio, 2000;
Malina, 2001; Malina and Selto, 2001; Bryant, Jones and Widener, 2004;
Malina, Norreklit and Selto, 2007). Most research focuses more on attribute
1 (Translating strategy into operational terms) and 4 (Providing feedback and
learning) than attribute 2 (Aligning the organizational units to the strategy)
and 3 (Communicating strategy to employee).
Surprisingly, there is only one research study (De Geuser, Mooraj and
Oyon, 2009) that refers to all four BSC features and test them separately;
however, the authors focus only on BSC users to examine whether these

four features of BSC and top management support are the sources of BSC
contributions. They ind that attribute 1 (Strategy) and 4 (Feedback) seem
to be the key sources of overall improvement; while attribute 2 (Alignment)
and 3 (Communication) show marginal impact. Top management support
do not inluence any perceived organizational performance.
This current study has extended prior studies by examining all four BSC
features in order to classify the different stages of BSC application. Firms
with attribute 1 are considered as BSC-implemented irm, which can be
reclassiied as fully-implemented or partially-implemented irms, depending
on the application of the other three BSC attributes. Speciically, the BSC-
implemented irm with attribute 2, 3, and 4 will be classiied as fully-
implemented irm, while one with only certain attributes will be classiied
as partially-implemented irm.
The Stages of BSC Application
In order to identify the stages of BSC application, most prior studies have
taken irm’s self-assessed response as given. As mentioned earlier, the
misunderstanding of BSC concept can bias the research results. To mitigate
the different interpretation of BSC concept, researchers should ask the
characteristics of a irm’s performance measurement system that help relect
the BSC attributes embedded in its performance measurement system and
allow researchers to classify the stages of BSC application without relying
on the irm’s self-assessed response.
This section presents (1) the prior studies that relied on the irm’s response
about the stage of BSC application, (2) the studies that relied on the
irm’s response about the characteristics of its performance, and (3) the
classiication framework developed in this study.
Relying on irm’s response about BSC application

In order to explore the BSC practice among the targeted irms, most prior
studies have taken irms’ self-assessed response as given.
Some studies (e.g., Thinwilai, 2005) have asked irms to indicate whether
or not they are BSC irms by asking only one YES/NO question. Several
studies (e.g., Ittner, Larcker and Randell, 2003; Speckbacher, Bischof

and Pfeiffer, 2003; Assiri, Zairi and Eid, 2006; Chen, Duh and Lin, 2006;
Jusoh, 2007; Yu, Perera and Crowne, 2008; Yongvanich and Guthrie,
2009) have usually required irms to specify the stage of BSC application.
Then, researchers have assigned the responding irms as non-BSC or BSC
users based on the selected stages. For example, Ittner et al., (2003) have
classiied the stages of BSC implementation into six stages, which are later
used for assigning irms as non-BSC or BSC irms as follow:
Table 1: Ittner et al., (2003) Classiication Framework
BSC Stages Classiication

(1) Not considered Non-BSC irms
(2) Implemented and abandoned
(3) Considering
(4) Implementing now
(5) Used BSC irms
(6) Used extensively
Firms are classiied as Non-BSC irms if the irms’ respondents identify

that their irms are at the stage of (1) Not considered, (2) Implemented and
abandoned, (3) Considering or (4) Implementing now. BSC irms are those
at the stage of (1) used or (2) used extensively.
Very few studies (i.e., Speckbacher et al., 2003; Yongvanich and Guthrie,
2009) are in line with the above classiication, but provide further valuable
consideration. Speciically, the BSC attributes are additionally considered
for irms that initially respond that they are at the stages of BSC usage (or
BSC users).
For example, Speckbacher et al., (2003) have classiied the stages of BSC
implementation into seven stages and have consequently assigned irms as
non-BSC or BSC following irms’ selected stages. Subsequently, BSC irms
are classiied into three types of BSC regarding the applied attributes of BSC.

Table 2: Speckbacher et al., (2003) Classiication Framework
BSC Stages Classiication Criteria

(1) No contact with BSC Non-BSC
thus far irms
(2) Know BSC
(3) Studied BSC, but no
concrete steps taken
(4) First steps already
taken
(5) BSC project has existed
(6) BSC implemented in BSC irms (1) Identify strategic
individual business units Type 1 measures or objectives
(7) BSC implemented for (2) Group strategic
entire company measures or objectives into
perspectives
Type 2 Type 1 with the following

criterion:
(3) Employ cause-and-
effect chains
Type 3 Type 2 with some or all of

the following criteria:
(4) Contain action plans/

target
(5) Link Measures to

incentives
Responding irms were classiied as Non-BSC irms if they specify that

they are at the stage of (1) No contact with BSC thus far, (2) Know BSC,
(3) Studied BSC, but no concrete steps taken, (4) First steps already taken
or (5) BSC project has existed. Whereas, irms at the stage of (1) BSC
implemented in individual business units or (2) BSC implemented for entire
company are considered as BSC irms. The BSC irms are then analyzed
to establish whether or not they have the following BSC attributes – (1)
Identify strategic measures or objectives, (2) Group strategic measures
or objectives into perspectives, (3) Employ cause-and-effect chains, (4)
Contain action plans/target and (5) Link Measures to incentives. This allows
researchers to re-categorize these BSC irms into three groups regarding
criteria mentioned in Table 2.

BSC irms with strategic measures grouped into perspectives are initially
classiied as Type I BSC users. If Type I irms have cause-and-effect chains,
they are considered as Type II users. Finally, Type II users with action plans/
target and/or incentive linked measures will be perceived as Type III irms.
Regarding conceptual foundation of BSC and the stages of application

based on Roger (2003), the key feature of BSC is translating strategy into
operational terms: deriving measures from strategy, grouping those measures
into multiple perspectives and illustrating the value-creation process through
causal links. Hence, only Type II and III BSC irms should be considered
as BSC implemented irms (or BSC users). Whereas, Type I irms are those
at the adoption stage.
Furthermore, Speckbacher et al. (2003) have not studied all four attributes of
BSC; Yongvanich and Guthrie (2009) have done so but have not investigated
those attributes separately.
At this point, it is crucial to call attention to the important concern – different

interpretations of BSC that are increasingly expressed in prior studies.
Particularly, some academics and practitioners may consider BSC as a
performance measurement system since their knowledge about BSC is
based only on the original 1992 BSC article, which is only one part of the
current BSC concept (Kaplan, 2010).
As aforementioned, dissimilar interpretations (or misunderstanding) of

BSC concept can affect the irm’s self-assessed response about the BSC
application and, subsequently, bias the research results. Speciically, irms
with similar BSC attributes may specify the BSC stage differently. Firms
with some BSC attributes2 possibly perceive that they are not qualiied
enough to claim that they are BSC users. They probably select the stage of
“implementing now” or “irst step has been taken.” Hence, researchers in
this case classify these irms as Non-BSC users despite the fact that they
are. In contrast, irms without BSC attributes3 may believe that they are
2
For example, irms with performance measurement systems containing strategic inancial
and non-inancial measures that can be illustrated as cause-and-effect relationships across
multiple perspectives; however, the other three attributes have not been implemented.
3
For example, irms with performance measurement systems containing strategic inancial
and non-inancial measures that cannot be illustrated in causal chains
10

BSC users as the BSC has been initiated in their irms. Therefore, they may
respond to the questionnaire by selecting the stage of BSC usage. This
deinitely affects the classiication of BSC application and subsequently
distorts the research results.
In order to mitigate the misunderstanding of BSC concept, the researchers

should require respondents to identify the characteristics of their irms’
performance measurement system, not to straightforwardly indicate the stage
of BSC application. These features mirror the BSC attributes embedded
in a irm’s performance measurement systems. That is, the characteristics
of a irm’s performance measurement system relecting the BSC attributes
should be considered to identify the stage of BSC application for each
responding irm.
Relying on irm’s responses about the characteristics

of its performance measurement system
Only a few studies (e.g., Soderberg, 2006) have classified the BSC
application considering the characteristics of performance measurement
systems (PMS) at the business unit level. Speciically, the structure and the
use of current performance measurement system are employed to categorize
units as BSC or non-BSC without asking whether or not they are BSC users.
Speciically, responding business units were initially classiied as BSC users

at level 1 if they have Strategy attribute (i.e., its business unit strategy is
well deined and the performance measures are derived from such strategy).
The BSC level 1 users are then analyzed to establish whether or not they
have the following BSC attributes: Balance (PMS contained inancial and
noninancial measures and PMS contained driver (leading) and outcome
(lagging) measures), Causal links (PMS has measures that are linked through
driver-outcome relationships and business unit understand the potential
driver-outcome relationship among individual measures), Double loop
learning (Deviation from expected or planned results causes the business
unit’s management to question the unit’s business strategy), and Tie to
compensation (Business unit use the PMS to compensate/reward some
or all of unit’s employees). This allows researchers to re-categorize these
BSC units into different stages regarding the criteria mentioned in Table
3. Note that irms that have not met any of the requirements are classiied
as non-BSC users.
11

Table 3: Soderberg’s (2006) Classiication Framework
BSC
Classiication Attribute Criteria
Level
Non-BSC No criterion is met.
users
BSC users 1 Derived (1) Business unit strategy is well deined.
from (2) Performance measures are derived from
strategy such strategy.
2a4 Strategy+ BSC level 1 with the following criteria
Balance (1) PMS contained inancial and noninancial
measures.
(2) PMS contained driver (leading) and out-
come (lagging) measures.
2b Strategy+ BSC level 1 with the following criteria
Causal (1) PMS has measures that are linked through
links driver-outcome relationships.
(2) Business unit understand the potential
driver-outcome relationship among individual
measures.
BSC users 35 Strategy+ Level 2a with Causal links, or
Balance+ Level 2b with Balance
Causal
links
46 Level 3 with some or all following criteria
Double (1) Deviation from expected or planned results
Loop causes the business unit’s management to
Learning question the unit’s business strategy.
Tied to (2) Business unit use the PMS to compensate/
Compensa- reward some or all of unit’s employees
tion
4
This level 2a is consistent with the Speckbacher et al.’s (2003) Type 1 BSC plus a
well-deined strategy.
5
This level 3 is consistent with the Speckbacher et al.’s (2003) Type 2 BSC plus a well-
deined strategy.
6
This level 4 is partially consistent with the Speckbacher et al.’s (2003) Type 3 BSC.
12

Level 1, 2a, 2b, and 3 are consistent with attribute 1 (Strategy). Level 4
combines attribute 3 (Communication) and 4 (Feedback). However, attribute
2 (Alignment) has not been considered.
Based on the key features of BSC, business units at level 3 and 4 should be
categorized as business units at implementation stage (BSC users); however,
those at level 1, 2a and 2b should be done as those at adoption stage.
In line with Soderberg’s classiication of BSC attributes, this present study

mitigates the interpretation problem by requiring respondents to identify
the characteristics of their irms’ performance measurement systems, not
to straightforwardly indicate the stage of BSC application.
However, Soderberg’s (2006) have not considered all attributes of BSC.

Thus, this current study has extended prior research by developing the BSC
classiication framework considering all four attributes of BSC with the
assumption that a irm’s responses about its characteristics of performance
measurement system can relect its actual practice. The BSC attributes
applied and speciied by responding irms allow this paper to classify
irms into different stages of BSC application – nonadoption, adoption,
and implementation.
Furthermore, the results of this current study should complement those of

prior studies mainly conducted among large irms in speciic industries in
the US and Europe.
The developed systematic framework of BSC considering four attributes

of BSC as the necessary criteria to indicate the stage of BSC application
for each responding irm is discussed in the next section.
The Developed Classiication of BSC Stages in This Study
Based on the conceptual foundation of BSC, the comprehensive framework

for classifying the stage of BSC application along with the BSC attributes
are proposed in Table 4.
13

Table 4: The Developed Framework for Classifying the Stages of BSC Application
BSC
Conditions
Stages
Non-Adoption No any criterion is met.
Adoption Adoption irm = Firm with the following criteria:
(1) Financial and non-inancial measures
(2) Grouped into perspectives
Implementation7 Implementation irm = Adoption irm with the following sub-attributes
to satisfy Attribute 1: Translating strategy into operational terms
(1) Well-deined strategy
(2) Strategic objectives or measures
(3) Cause-and-effect relationship
Firms at this stage are classiied as BSC irms, which can be re-
classiied as partial- or fully-implemented BSC irms:
Implementation Partial8
BSC irms that have applied some of the following attributes:
Attribute 2: Aligning the organizational units to the strategy
(1) Aligning business units’ or support functions’ strategies to irm’s
strategy
(2) Disseminating objectives or measures throughout the company
Attribute 3: Communicating strategy to employees
(1) Communicating vision, mission, and strategy throughout the
company
(2) Understanding irm’s strategy
(3) Linking measures to reward system
Attribute 4: Providing feedback and learning
(1) Linking strategy to operating plan and budgeting systems
(2) Information system for strategy review
(3) Process for formulating, learning, and reviewing strategy
(4) Process for questioning and reining strategy
Full BSC irms that have applied all of the above.
7
This stage is consistent with the Speckbacher et al.’s (2003) Type 2 BSC plus a well-
deined strategy and the Soderberg’s (2006) Level 3 BSC.
8
This stage covers the Speckbacher et al.’s (2003) Type 3 BSC plus a well-deined strategy
and the Soderberg’s (2006) Level 4 BSC.
14

As previously discussed, the BSC stages are determined by the BSC

attributes applied in irms’ performance measurement systems. Particularly,
irms that have met the irst two criteria (i.e., irms with inancial and
noninancial measures grouped into multiple dimensions) are classiied as
BSC-adoption irms; otherwise, they are Non-adoption ones.
Consequently, if BSC adoption irms have (1) Well-deined strategy, (2)

Strategic objectives or measures, and (3) Cause-and-effect relationships,
they are categorized as BSC-implementation irms. This is due to the fact
that all conditions for the attribute 1 are satisied. As the attribute 1 is the
key feature of BSC, irms that have translated strategy into operational terms
should be labeled as BSC-implemented irms, regardless of the existence
of other three attributes.
Finally, if BSC-implementation irms have all BSC attributes, they are

considered as fully-implemented BSC irms. If not, they are perceived as
partially-implemented ones.
research methodology
This study explores BSC application among listed irms in Thailand

by employing a mail-survey. Data collection and survey instrument are
discussed in this section.
Data Collection
Samples in this cross-sectional survey research are 508 irms listed in the
Stock Exchange of Thailand (SET) and Market for Alternative Investment
(MAI). Based on a total of 73 responses (14.37 percent response rate), ive
have incomplete data; hence, 68 responses were used for the data analysis.
This low response rate is not unusual for the mail-survey in Thailand
(Pholnaruksa, 2007). Table 5 presents the industries of the responding
irms in comparison with targeted irms.
15

Table 5: The Targeted and the Responding Firms
Industry Targeted irms Responding irms

No. of Propor- No. of Propor-
irms tion irms tion
SET Financials 57 11% 11 15%
Agribusiness & Food 41 8% 5 7%
Consumer Products 40 8% 4 5%
Industrials 78 15% 10 14%
Property & Construction 79 16% 14 19%
Resources 25 5% 5 7%
Services 84 17% 12 17%
Technology 38 7% 4 5%
MAI 66 13% 8 11%
Total 508 100% 73 100%
Survey Instrument
A survey package (a questionnaire with cover letter and a postage-paid, self-

addressed envelope) was mailed out to CFO in May and June, 2011. The
questionnaire was irstly developed based on the BSC framework developed
and proposed in Table 4 in this study. Consequently, the questionnaire
is revised based on the pre-tested results and comments from academics
and the CFOs’ of the pre-test irms. Respondents were assured that their
anonymity would be preserved.
There are three sections in a questionnaire. Section 1 requires respondents

to answer the YES/NO questions to indicate the characteristics of the
performance measurement systems and management processes in their
organizations. Section 2 requires respondents to answer the YES/NO
questions to identify whether the irm is BSC user, or not. Section 3
requires the respondents to specify the percentage ranging 0-100 about
BSC attributes.
Data from section 1 and 3 allow researchers to identify the BSC attributes
embedded in performance measurement system and to specify the stage
of BSC application of responding irm. That is, data from section 1 and
3 help identify the stage of BSC application of responding irm based on
16

the classiication framework developed in this study. Data from section 2

show the classiication of BSC application (i.e., BSC users, non-BSC users)
based on self-assessed response. Thus, this allows researchers to compare
the classiication of BSC application based on the developed framework
and that based on self-assessed response. Logically, the extent that the BSC
application classiied by the developed framework disagrees with that by
self-assessed response relects the misunderstanding of the BSC concept.
That is, if the BSC application classiied by the developed framework
agrees with that by the self-assessed response, such a responding irm has
classiied itself correctly. However, if the BSC application classiied by the
developed framework disagrees with that by self-assessed response, such
a responding irm has misclassiied itself.
The details of each section are as follows:
Section 1: The irst part requires respondents to answer the YES/NO

questions to indicate the characteristics of the performance measurement
systems and management processes in their organizations. Speciically, these
responses relect the BSC attributes embedded in the irms’ performance
measurement systems as follows:
Attribute 1 (Strategy):
(1.1) using inancial and non-inancial measures (1 sub-question),
(1.2) grouping measures into multiple perspectives (1 sub-question),
(1.3) translating strategy into operational terms (4 sub-questions),
Attribute 2 (Alignment):
(2) aligning the organizational units to the strategy (2 sub-questions),
Attribute 3 (Communication):
(3) communicating strategy to employees (3 sub-questions), and
Attribute 4 (Feedback):
(4) providing feedback and learning (4 sub-questions).
A irm is considered to have has a particular attribute in its performance

measurement system if the responses for all sub-questions under such
attribute are YES.
17

Attributes 1.1 and 1.2 are the criteria for categorizing irms into irms at
non-adoption or adoption stage. If attributes 1.1 and 1.2 are met, such
responding irms are initially classiied as irms at adoption stage (BSC-
adoption irms).
Attribute 1.3 is a criterion for determining whether BSC-adoption irms

can be classiied as BSC implemented irms. If attribute 1.3 are met, such
BSC-adoption irms are then classiied as irms at the implementation stage.
The last three attributes (attributes 2, 3, and 4) are conditions for categorizing
BSC-implemented irms into partially-implemented or fully-implemented
ones. If BSC-implemented irms have attributes 2, 3, and 4, they are
classiied as fully-implemented irms
Thus, the BSC application mainly consists of four stages – Nonadoption,

Adoption, Partial implementation, and Full implementation.
Section 2: The self-assessment about BSC application is in the second part.

This allows the researcher to examine the different interpretations of BSC
by investigating whether the stages of BSC application responded by irms
differ from those determined by the BSC framework proposed in this study.
Section 3: The respondents are also required to specify the degree of

agreement in percentage9 for the additional 24 questions related to BSC
attributes. Each of the irst two sub-attributes has one question. The
remainder has six, four, four and eight questions, respectively. These
percentage responses are used in validating the appropriateness of
classifying BSC attributes based on YES/NO responses discussed later.
findings
The Survey Results
Based on the proposed framework, the BSC attributes applied in the irms’
performance measurement systems are indicated. Afterward, the BSC
application among responding irms are classiied as follows:
The percentage degree of agreement ranges from 0-100% and is divided into ive columns:
9
Least (0-20%), Little (21-40%), Average (41-60%), Some (61-80%), and Most (81-100%).
18

Table 6: The Survey Results
Stages of BSC Classiied by BSC attributes

application Number of irms Proportion
Non-Adoption 6 9%
Adoption 15 22%
Partial Implementation 12 18%
Full Implementation 35 51%
Firms without missing data 68 100%
Firms with missing data 5
Total 73
BSC-Adoption irm
An organization with a collection of inancial and noninancial measures
(attribute 1.1) that are grouped into perspectives (attribute 1.2) is considered
to be a BSC-adoption irm since it is at the stage of choosing to follow BSC
idea, which has these two conditions as the basic criteria. A irm not meeting
all of these two conditions is classiied as a non-adoption one.
Of the 68 useable observations, 62 answered YES to both questions (i.e.,

Financial and non-inancial measures (attribute 1.1) and Grouped into
perspectives (attribute 1.2)). At least, they could be classiied as BSC-
adoption irms. However, the performance measurement systems of some
irms contain additional attributes of BSC. This means that some irms could
be classiied as BSC-implementation irms; some could not.
BSC-Implementation irm
The performance measurement systems of 47 BSC-adoption irms meet
the strategy requirement: the strategy is well-deined and the measures are
derived from strategy as well as can be shown as a causal chain to illustrate
the value-creation process. These sub-attributes are the key important
features of BSC in translating strategy into operational terms. Thus, these
47 irms are classiied as BSC-implemented irms. The remaining 15 irms
are still at the BSC-adoption stage since some conditions are not met.
Consequently, the other BSC attributes for BSC-implemented irms are

examined. Thirty ive irms are considered as fully-implemented BSC irms
since all of the conditions for alignment, communication and feedback are
19

met. The rest (12 irms) are classiied as partially-implemented BSC irms
as they have only certain attributes of BSC.
The Misclassiication of BSC Concept
As mentioned earlier, relying on the self-assessed responses can bias the

research results since irms may dissimilarly interpret the BSC concept
and, subsequently, differently classify themselves. The evidence of
misclassiication highlights the importance of accurate classiication of
BSC application at the irst step of any determinant and consequence study.
The stages of BSC application classiied by BSC attributes proposed in
this paper in comparison with those classiied by self-assessed responses
are as follows:
Table 7: The Comparison of the Classiication Based on the Proposed Framework

and on Self-Assessed Responses.
Classiied by BSC Classiied by

Stages of BSC application attributes Self-assessed responses
Number of irms BSC Non- BSC
Non-Adoption 6 1 5
Adoption 15 4 10
Partial Implementation 12 11 2
Full Implementation 35 16 19
Firms without missing data 68 32 36
Firms with missing data 5 2 3
Total 73 34 39
This empirical result is not surprising since many academics have expressed
their concerns about various deinitions of BSC concept (e.g., Malmi, 2001;
Ittner et al., 2003; Kaplan, 2010).
One out of six irms claims to be a BSC user despite the fact that it is
only at the non-adoption stage. It is found that this irm has just started
the BSC project. Four out of ifteen irms claims to be BSC users despite
the fact that they are only at the adoption stage. One irm does not have
even a well-deined strategy; while, one has just started the BSC project
for six months and then rejected it; its measures are not linked to its irm’s
20

strategy. The other two irms do not have a causal-link among the strategic
objectives or measures.
Regarding irms with BSC implementation, only 2 out of 12 partially-

implemented irms and 19 out of 35 fully-implemented irms misclassiied
themselves. These firms have unknowingly implemented the BSC.
Anecdotal evidence from the interview reveals that top management
encourages developing a firm’s performance measurement system
containing a set of integrated inancial and noninancial performance
measures that are explicitly linked to its strategy. The causal links describe
an organization’s value-creating processes. Top management believes
that this system aligns business activities to the vision and strategy of the
organization, improves internal and external communications, and monitors
organizational performance against strategic goals. Noticeably, the BSC
has been implemented unintentionally.
Overall, the misclassiication rate is 38% (26 out of 68 irms). Although

62% of responding irms can correctly classify themselves, this empirical
evidence presents the interpretation issue that should be mitigated.
Inaccurate classiication of BSC application can misrepresent the research
results and mislead the implication for practices.
Additional Test: Test for Validity of Classifying BSC Attributes

From Yes/No Responses
As aforementioned, this paper identiies the BSC attributes from YES/

NO responses (Data in section 1 in the questionnaire). One may cast
doubt that irms with YES (NO) responses do (not) have such practices in
their organizations. Although the actual practices cannot be observed, the
respondents are required to specify the degree of agreement in percentage
(0-100%) for 24 statements to relect the degree of BSC attributes10
embedded in their irms’ performance measurement systems in section 3
in the questionnaire.
10
Based on the untabulated results, a reliability check on each attribute produces cronbach’s
alpha values above the lower limits of normal acceptable value (Nunnally and Bernstein,
1994), conirming the reliability of all constructed variables.
21

Logically, irms that respond YES (NO) in the YES/NO questions should
exhibit high (low) percentage scores. Firms with a particular BSC attribute
identiied by YES/NO responses should have higher percentage scores for
such attribute than those without.
The following tests are performed to test whether the classiication of BSC
attributes by relying on YES/NO responses is valid.
Test for mean comparison

As mentioned earlier, the mean percentage score of YES-response irms
should be signiicantly greater than that of NO-response irms, regarding
each attribute. The t-Tests for equality of means and Mann-Whitney tests11,
for each attribute, show that the mean percentage response of YES-response
irms (YES-irms) is greater than that of NO-response irms (No-irms) at
0.05 signiicance level. Hence, the YES/NO responses can be employed to
classify the BSC attribute and, subsequently, the stage of BSC application.
Test for 60-percent cutoff point

For each attribute, the mean percentage score of YES-irms is examined
whether it is greater than 60 percent. This cutoff-point12 is qualitatively
similar to the cutoff-point used in Soderberg (2006). Although the use of
each BSC attribute can be classiied by relying on YES/NO responses, this
additional test is still necessary due to the fact that Yes/No responses are
missing for some observations. More importantly, the results from this
analysis provide the valid cut-off point for percentage responses, which
can be used for future research. The untabulated results show that, for each
attribute, the mean percentage score for YES-irm is signiicantly greater
than 60 percent at 0.05 signiicance level. Hence, the 60-percent can be
applied as a cutoff point for every BSC attribute. Firms with greater-
than-60% average response of particular attributes will be considered as
irms with such attributes.
11
When the normality assumption for t-Test is violated, we employ nonparametric
Mann-Whitney test.
12
This 60-percent cutoff point is the upper (lower) limit of percentage in the “average”
(“some”) column.
22

Agreement test
The above two additional tests show that the attribute classiication using
YES/NO responses and that using 60-percent cutoff point are valid.
However, one may question whether these two classiication methods
provide the similar results. If both methods can similarly identify the
attributes, when the YES/NO response is this missing, researcher can
employ the 60-percent cutoff point instead. Therefore, a test for agreement
between the attribute classiication using YES/NO responses and that using
60-percent cutoff point has been performed (i.e., YES/NO method VS
60-percent-cutoff-point method). The untabulated Kappa test results show
that the agreement between these two methods of attribute classiication is
statistically signiicant at 0.05 signiicance level, except for one sub-attribute
(i.e., well-deined strategy) at 0.10 level. The rate of agreement is over 70
percent. Thus, these two methods provide signiicantly similar results.
The results from three tests support the identiication of BSC attributes, for
each responding irm, by considering YES/NO responses. If the YES/NO
responses are missing, the 60% cutoff point can be employed to identify
the use of each BSC attribute.
Table 8: The Revised Results of Survey
Classiied by
Classiied by BSC
Self-assessed
Stages of BSC applicationc attributes
responses
Yes/No % Total BSC Non- BSC
Non-Adoption 6 6 1 5
Adoption 15 1 16 4 11
Partial Implementation 12 12 11 2
Full Implementation 35 3 38 17 21
Firms without missing data 68 4 72 33 39
Firms with missing data 5 (4) 1 1 0
Total 73 73 34 39
Hence, the revised results of the survey are shown in Table 8. 22% and 69%
are irms at adoption and implementation stages respectively. 39% (28 out
of 72 irms) misclassify themselves.
23

Conclusions and discussion
Based on the conceptual foundation of BSC, this paper has developed a

systematic framework for classifying the stages of BSC application. The
BSC attributes are initially identiied and are subsequently employed
as criteria for specifying the stages of BSC application – Non adoption,
Adoption and Implementation. The BSC application among listed irms
in Thailand is explored by bringing the proposed framework into play and
by asking for the self-assessment.
Based on developed BSC framework and survey data, 69% are considered
as BSC users; 38% misclassiied themselves. The results support the notion
that irms differently interpret the BSC concept (e.g., Ittner et al., 2003;
Burkert et al., 2010; Kaplan, 2010), causing the erroneous categorization.
Some irms think that they are BSC users; however, they are actually not. On
the contrary, several irms perceive that they are not BSC users, despite the
fact that they are. Misclassiication is perhaps one of the reasons for mixed
evidence in prior studies and can distort the future research results if this
problem has not been solved. Hence, the evidence in this study highlights
the importance of categorizing the stages of BSC application accurately
before conducting any determinant or consequence analysis (Burkert et
al., 2010). This study also shows that the classiication employing YES/
NO questions is valid.
Regarding the contribution to the literature, this study provides a systematic

framework for the classiication of BSC application by considering BSC
attributes, not the irms’ self-assessed responses. As this framework helps
mitigate the problem of dissimilar interpretations regarding BSC concept, it
should be applied to future research in order to reveal the reliable research
results.
According to implications for practice, based on the surveyed data from Thai
companies listed on SET and MAI, almost 70% of responding irms have
implemented BSC either intentionally or unintentionally. This evidence
preliminarily shows that accounting techniques and practices in Thailand
are by some means adopted from those in more developed countries, mainly
the United States. This research also complements prior studies mainly
performed among large irms in speciic industries in the US and Europe.
24

Moreover, the proposed framework can be utilized as a self-assessment

outline for reviewing whether the irm’s performance measurement system
is along the lines of BSC concept or as an initial guideline for putting BSC
into practice.
Concerning limitations, although mail survey is appropriate for study that

explores the interesting issues in a large sample at a relatively low cost, its
common limitation is low response rate and self-response bias. This study
assumes that the irm’s responses about its characteristics of performance
measurement system can relect its actual practice. Furthermore, the data
of each company in the sample is gathered only from one person in order
to represent the actual behavior with regard to BSC attributes in such
irm. Since there is no way to determine how these data truly represent the
irm’s behavior (Roger, 2003), this limitation is alleviated by collecting the
data from the most knowledgeable person, i.e., the CFO or top executive.
Regarding the response scale, some returned questionnaires are responded
without specifying the percentage scores, but selecting the interval range
of percentage scores; hence, following Pholnaruksa (2007), the midpoint
of interval range has been assigned the corresponding selected interval.
This study can be replicated to examine the BSC application in different

contexts with a larger sample size. The proposed framework in this paper
can also be employed as a starting point before testing the determinants
or consequences of BSC application; hence, prior determinant and
consequence studies can be re-performed by employing this framework
to irstly identify the stages of BSC application. Moreover, the details of
how balanced scorecard is developed are beyond the scope of this study;
thus, the action research can be conducted to complement this study by, for
example, investigating how irm derives relevant measures from its strategy,
exploring how irms cascade the corporate-level strategy to business units
and supporting functions, or determining when the BSC measures should
be linked to reward systems.
Acknowledgements
This paper has been presented at the 7th Asia-Pacific Management

Accounting Association (APMAA) conference in Malaysia in November
2011. I would like to thank my advisor, Asso.Prof.Vorasak Toommanon,
25

Ph.D., and the anonymous reviewer on the earlier drafts of this paper. Any
errors or omissions remain my responsibility.
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28

BAlANCEd SCOrECArd
ImplEmENTATION WIThIN A mAlAySIAN
GOvErNmENT-lINKEd COmpANy
Norlaila Md Zin
SuzanaSulaiman
Aliza Ramli
Anuar Nawawi
Accounting Research Institute and Faculty of Accountancy,
UniversitiTeknologi MARA, Malaysia
Abstract
This study attempts to gain insights on the implementation of Balanced

Scorecard (BSC) within a Malaysian Government-linked Company
(GLC) in line with the government-led GLC Transformation Programme
(GLCTP). The GLCTP was introduced by the Malaysian Government to
steer the GLCs in becoming regional and international players. The study
employs a case study method involving semi-structured interviews, review
of documentation and website information. Consistent with the literature,
our indings revealed that the case irm indeed implements BSC that has
been tailored to its own needs. In this paper, we also suggest that four
key factors: top management commitment, information technology (IT),
communication, and organisational culture are critically required for GLC
irms to successfully implement the BSC.
Keywords: Government-linked Company (GLC), Balanced Scorecard

(BSC), Top Management Commitment, Information Technology,
Communication, and Organisational Culture.

Asia-Paciic Management Accounting Journal
Introduction
During the last few decades the change in the global business landscape
has witnessed the transformation of many government agencies into private
organisations, known as the Government-linked Companies (GLCs).
The GLCs represent state-run organisations that are expected to fulil
both the economic responsibilities of delivering performance and social
responsibilities due to the nation. In Malaysia, the GLCs play an important
role in shaping the economy as they form approximately 36% of the market
capitalisation in 2009. As the major shareholder of these companies, the
Malaysian government was keen to boost the performance of the GLCs
so that they become regional or world players in their respective industry.
Hence, in May 2004, the government introduced the Government-linked
Companies Transformation Program (GLCTP) to steer the economy
towards a new high ground underpinned by the performance of the GLCs.
Following this transformation program, the Putrajaya Committee on GLCs
High Performance (PCG) was set up to act as a catalyst in implementing
this transformation. PCG has introduced many initiatives including the
guideline that focuses on Key Performance Indicators that is commonly
known as the Blue Book (PCG, 2005a).
To support the initiatives in the Blue Book, many Malaysian GLCs have
started to adopt Management Accounting tools and techniques. Among the
adopted tools are the inancial statement and ratio analysis, budgetary control
and budgeting, benchmarking, and Balanced Scorecard (BSC). Among these
tools, the BSC appear to be one of the most extensively used framework
for the purpose of achieving superior performance. The BSC model has
received the most attention by practitioners and researchers partly due to its
comprehensive approach and ability of the framework to incorporate both
inancial and non-inancial measures. It provides a holistic performance
measurement and management tool through four perspectives, viz, inancial,
customer, internal business process, and learning and growth. Historically,
BSC is a management accounting technique used in the management control
system and the performance measurement system (PMS) to fulil the need of
having integrated inancial and non-inancial measures. BSC is often viewed
by many as a strategic performance management system implemented by
organisations. In addition, BSC is regarded as a comprehensive PMS that
promotes value creation to the management of an organisation (Crabtree
and DeBusk, 2008).
30

Balanced Scorecard Implementation within a Malaysian Government
The literature is replete with prior studies on BSC which mainly focuses on
the relationship of BSC implementation with organisational performance
(e.g. Crabtree & DeBusk, 2008; Davis and Albright, 2004). However, most
of these studies were quantitative in nature and conducted within the western
countries. From a local perspective, BSC studies within the GLCs tend to
focus on the comparison of performance of GLCs and the non GLCs, as
well as the performance of GLCs pre and post privatisation. For instance,
Othman et al., (2006) in his case study indings highlighted the problems
encountered by a Malaysian company in implementing the BSC which
includes the peculiarity of the Malaysian culture, lack of communication
and effective information system. Indeed, studies that examine the process
involved in the BSC implementation particularly within the GLCs context
is sparse (Norhayati and Siti Nabiha, 2009). Moreover, even though, the
BSC reputation is signiicantly recognised, the implementation remains
complex (Assiri, Zairi and Eid, 2006). Further, Assiri, Zairi and Eid
(2006) in an exploratory worldwide study of BSC adopters call for a micro
type of research, where exploratory studies need to be done to provide
a better understanding of the various factors that could affect the BSC
implementation. Given this scenario, the current study attempts to examine
the BSC implementation process in a local GLC using a qualitative approach
which provides an opportunity for the researcher to examine the process
in its natural setting, thereby allowing for a better understanding of the
process to be achieved.
Following this suggestion and owing to the little information available

in the literature regarding BSC implementation in Malaysian GLCs, the
current study aims to provide additional insights on the implementation of
BSC in one of the largest GLC in Malaysia. The study aims to contribute
knowledge in BSC literature in a GLC that is a unique setting in Malaysian
business landscape. It also contributes important insights to the practice
by providing a better understanding of the critical factors that facilitate
BSC implementation to the GLCs, PCG and other companies who are
contemplating to use the tool.
31

research Objectives
The primary aim of this paper is to study the implementation of BSC within
a selected GLC irm in Malaysia. Speciically, this study seeks to address
the following research objectives:
1. To explore the nature of BSC implementation within a Malaysian

GLC.
2. To investigate the critical success factors in the implementation of

BSC within a Malaysian GLC.
review of literature
Performance Measurement Systems
According to the information retrieved from businessdictionary.com,

performance is deined as the “accomplishment of a given task measured
against pre-set standards of accuracy, completeness, cost, and speed. System
is deined as a particular way of doing something (Hornby, 2000). Lohman,
Fortuin and Wouters (2004) deine Performance Measurement as “an activity
that managers perform in order to reach predeined goals that are derived
from the company’s strategic objectives”. Effective measurement and
monitoring of organisation’s performance is an essential element to achieve
improved performance. Verbeeten and Boons (2009) added that PMS
facilitate communication of irms’ strategic priorities, organisation wide.
Thus, PMS can be regarded as a means to gain competitive advantages and
continuously react and adapt to external changes (Cocca & Alberti, 2010).
Chenhall (2005) deine PMS as a management and control system, which
yields information that can be shared among internal and external users
(Henri, 2004) through the integration of inancial and noninancial measures
that would relect value creation activities in an organisation, hence leading
to better performance (Grafton, Lillis and Widener, 2010). The past decade
has seen many organizations using Performance Measurement Systems
(PMS) as part of the management tool to improve and sustain performance.
Poister (2003) and Fleming, Chow and Chen (2009) add that PMS, which
is used for strategy implementation, could potentially enhance a company’s
32

performance. The uses of measures in PMSs assist managers to understand,

monitor and manage organisation (Chenhall, 2005; Hall, 2008).
The importance of performance measurement systems include (1)

identifying strategies in terms of highest potential of organisation’s objective
achievement, (2) aligning management process with the chosen strategic
objectives, (3) assisting managers in translating strategy to improve targets,
(4) communicating expectations to employees, and (5) providing feedback
for improvement (Chenhall, 2005; Ittner & Larcker, 2003).
However, the traditional PMS fail to measure indication of value creation,

poor consideration of asset creation and growth, lack of measurement of
innovation, learning and change as well as concentrating much on short
term rather than long term goals. As such, the traditional performance
measurement concept may not be relevant to the modern organisations
leading to a transformation of the concept (Folan& Browne, 2005). The
lack of standard deinition of PMS prompted (Franco-Santos et al., 2007)
to conduct citation analysis of the meaning of PMS. They grouped PMS
into ive categories as selection and design of measures, collection and
manipulation of data information management, performance evaluation
and rewards, and system review.
The implementation of PMS has switched from the focusing on the inancial
indicators to the inclusion of non-inancial indicators which are said to be
more comprehensive. Among the popular PMS incorporating both inancial
and non-inancial measures in evaluating performance are the Integrated
Performance Measurement System (Bititci, Carrie and McDevitt, 1997) and
the Balanced Scorecard (BSC) by Kaplan and Norton (1992). However,
BSC has taken the leading role in terms of popularity and usage among the
academics and practitioners. The common assertion is that BSC is claimed
to be the most comprehensive PM tool enabling organization to identify
the vision mission, strategic objectives, and targets.
Balanced Scorecard (BSC)
There has been a general claim that BSC is the most popular tool used by
academics and practitioners due to its holistic approach. BSC was initially
introduced by Kaplan and Norton (1992) to overcome the incompleteness
33

of traditional measures which focuses on lagging indicators, especially

financial indicators such as Return on Equity (ROE) and Return on
Investment (ROI). BSC has progressed from being a measurement tool
to a management tool, and currently is an icon of strategic performance
management tool (Brudan, 2010).
The four perspectives

BSC proposes four different perspectives in the co-ordination of the entire
organization’s activities in present and future situations (Kaplan and Norton,
1992; Parmenter, 2010).
1. Learning and growth perspective identiies the excellence competencies

(e.g.: human capital, information capital, organizational capital) that
an organization must possess in order to enjoy value creation.
2. Internal perspective focuses on the organization’s internal operations,

allowing managers to assess their business eficiency.
3. Customers’ perspective identiies customers’ leading indicators such as

customer satisfaction and brand recognition in order to ensure strong
customer loyalty.
4. Financial perspective, which complements the other perspectives,

evaluates the organization’s proitability using tools such as the ROI
and the EVA.
Using a combination of leading and lagging indicators, BSC has the advantage
of giving a complete snapshot of a irm’s performance. BSC was introduced
to counter the weaknesses found in the traditional measures in ensuring
effective monitoring, communicating, and driving performance (Kaplan
and Norton, 2001) and to properly assess organizational performance. The
popularity of Kaplan and Norton’s BSC soared shortly after its introduction.
It is frequently cited in relation to performance measurement (Neely, 2005).
BSC has now become a proliic subject for research, consulting practice
and theory. By integrating a set of measures derived from the company's
strategy, BSC allows top management to have a comprehensive view of
the irm. BSC is further said to facilitate effective communication of the
mission and objectives of the organization by giving a clear and a holistic
picture of the company’s progress (Liang and Wang, 2010).
34

Studies have documented that there are many factors inluencing the
adoption of management accounting practices including the BSC. Examples
of such factors are competition, strategy, and size (Ittner and Larcker,
2001; Chenhall, 2003; Chenhall and Langield-Smith, 2007; Duh, Xiao and
Chow, 2009). Among the inluential factors in the adoption are the irm’s
environmental and organizational attributes. These have been found to
impact the adoption of innovation in organizations (Chenhall, 2003; Ittner
and Larcker, 2001).
According to Sandhu, Baxter, and Emsley (2008), the adoption of BSC by

the securities industry in Singapore was due mainly to political/government
inluence. Corporate beliefs and organizational culture also impacted the
adoption of BSC. It is interesting to note that while Baird (2007) thinks
that organizational culture has no impact on the adoption, Sandhu, Baxter,
and Emsley (2008) on the other hand, are of the opinion that these factors
do inluence the practices. This view is supported by Daniel, Myers and
Dixon (2008) in the study on the decision to adopt new management
idea or tool by the UK organisations. It was found that top management
signiicant inluence affected the adoption decision. To achieve this, senior
managers need to emphasise the importance of performance management
through agenda management and verbal and written communication (Broad,
Goddard and Alberti, 2007).
Empirical Research on Malaysian GLCs
A review of the literature revealed that studies on Malaysian GLCs are still
limited. Table 1 provides a brief overview of key studies on Malaysian
GLCs.
35

Table 1: Overview of Studies on Malaysian Glcs
Theories/
Empirical
No. Authors Topic/scope theoretical Findings
evidence
Background
1. Sun and Relationship None Secondary data Total proit
Tong between from KLSE of improved as
(2002) privatisation of 24 GLCs a result of
government- before and privatisation
owned after
company and privatization
operating and
inancial
performance
2. Nik Exploratory Longitudinal Secondary No real
Ahmad study on the pre study on sources of the evidence that
(2008) and post- measuring Bloomberg GLCs are
performance of performance Interactive necessarily
the G-20 (the by proitabil- database as performing
twenty largest ity, output and well as the better or
GLCs) productivity. Bursa worse than
Malaysia (Ma- their non-GLC
Covers eleven- laysian Stock competitors
year-period Exchange) and
from 1996 to corporatein-
2006 formation.com
websites.
3. Lau and Assesses None Secondary data Reveal a
Tong the impact of on 15 GLCs signiicant
(2008) government over six years positive
ownership on (2000 to 2005) relationship
irm value in the between the
context of the degree of
Malaysian government
ownership and
irm value.
36

4. Norhayati Explanatory Institutional Case study in New change

and study of the theory and one GLC of
Siti changes in Laughlin’s Performance
Nabiha GLC due to (1991) Management
(2009) transformation framework is System
programme also used to remains as
introduced by enhance the ceremonial.
the government. understanding
of the level of
How change
accounting is
used as a tool
for
transforming
organizational
culture and how
accountants
perform as
change agents.
5. Entebang, Study the extent Based on The face-to- GLCs

Harrison, to which GLCs the review face concentrate
and Cyril have pursued of literature interview on
de Run and engaged on corporate survey using incremental
(2010) in CE activities entrepreneur- Likert scale aspect of CE
corporate ship ranging from 7 activities
entrepreneur- (very high) to 1
ship (very low)
6. Ab Razak, Examine the Tobin’s Q 210 irms listed Non-GLCs

Ahmad impact of an in performance
and Joher alternative Main Board is better
(2011) ownership/ (1995- 2005). GLCs in term
control structure of corporate
of corporate governance
governance on
irm
performance.
37

7. Yen, Investigates Twenty ive GLCs have a

Chun, the prevalence companies tendency to
Abidin of earnings from each manage their
and management ownership earnings
Noordin between structure were upwards
(2007) government collected, for while CFLCs
linked the years 2004 tend to adjust
companies to 2005 their earnings
(GLCs) and downwards
Chinese family
linked
companies
(CFLCs).
8. Othman, Examine No theory used Case study of BSC imple-
Abdullah, problems of Based on BSC BSC in training mentation was
Senik, BSC implementation center not as
Domil and implementation discussed by 9 interviews successful
Hamzah, Kaplan (1996), hence the
2006 Dinesh and author
Palmer (1999), highlighted
and Van Tessel the inhibitor of
(1995) BSC imple-
mentation.
As shown in Table 1 most studies on Malaysian GLCs used quantitative

method, except for Norhayati and Siti-Nabiha (2009). Their study adopted a
case study method to examine the implementation of PMS in a utility GLC
from the perspective of Institutional and Organisational Change Theory
(Laughlin’s 1991).
GLC Transformation Programme (GLCTP)
In its effort to get the private sector to drive the economy, the Malaysian
government felt that the GLCs’ performance should be strengthened. Hence
a GLC transformation programme (GLCTP), spearheaded by YAB Tun
Abdullah Hj. Ahmad Badawi, the former Prime Minister of Malaysia was
launched in May 2004. Consisting of four phases, it is to be implemented
from 2004 till 2015. To ensure a successful transformation, there is an urgent
need to examine why the GLCs had underperformed in terms of operations
and proitability over the last ifteen years, and thence ind ways to improve
their performances.
38

Adopting a holistic approach, the GLCTP aimed to increase not only

the shareholders’ value, but also to beneit all key stakeholders, namely
customers, labour force, suppliers, and Bumiputera uplifts. In addition,
the programme focused on these speciic areas: national development
foundation, performance, governance, shareholder value and stakeholder
management (PCG, 2005b).
The Putrajaya Committee on GLC High Performance (PCG) was formed

to facilitate the transformation of the GLCs. As a result of the committee’s
effort, guidelines were drawn up in what popularly referred to as the
“Blue Book”, otherwise known as “Implementation of Performance
Linked Compensation (PLC) in Government Linked companies (GLCs)”.
Essentially, the Transformational Programme stipulates that GLCs must
have Key Performance Indicators (KPIs) along with the Performance
Measurement. The PCG also set up internal transformational teams to boost
productivity by improving the organization processes, non-core unproitable
business and assets divesture. GLCs are required to have Headline KPIs
(forward looking company targets) and Economic Profit. With such
measures in place, GLCs are expected to inculcate a performance –based
culture that would lead to improved performance.
Given that RM353 billion (36%) of the market capitalization of the Malaysian
stock market being dominated by GLCs (PCG, 2011) there is no doubt that
GLCs play a signiicant vital role in the economic development in Malaysia.
Nevertheless, GLCs do not operate in a vacuum; they are expected to achieve
excellent performance, and at the same time preserve the interests of various
stakeholders such as the government and the public. Indeed, it is felt that
many GLCs can do much better if they undergo a transformation. The PCG
has issued guidelines in various colour-coded books. Examples of the books
are the Red Book on Procurement, Green Book on the Board of Directors,
and Blue Book on performance measurement. These books give details
of what are expected of the GLCs in terms of board effectiveness, social
obligations, procurement, capital structure, talent pool, high performance
culture, non-core assets management and customer service.
39

The GLC Blue Book
The Blue Book was introduced in 2004 to boost GLCs Value Creation.
It contains guidelines to advise the GLCs on what, and how to intensify
performance management. The responsibility of fully implementing the
guideline lies with the CEO and the Board. The book underlines six critical
areas of focus:
1. Establishing performance indicators and setting targets linked to

strategy.
2. Establishing KPIs and setting targets for senior management.
3. Reviewing business performance.
4. Reviewing individual performance of senior management.
5. Establishing appropriate compensation framework for senior

management.
6. Clarifying eligibility for intensiied performance management.
In order to transform itself successfully, it is crucial that there is integration

of all its divisions and business units. The Blue Book also emphasises
on the cascading of performance indicators to the lowest level of the
organization. These balanced and holistic indicators must clearly link
targets and performance ratings, including report headline performance
indicators such as the economic proit. The approved set of targets must
be achievable and yet allow room for change. To ensure greater success,
it is very important to monitor the company’s performance by conducting
reviews on the performance of the company, its various divisions, business
units and departments.
40

research method
This study employs a case study approach since case study has the
distinctive strength when a ‘how’ or ‘why’ question is being asked about
a contemporary set of events, over which the investigator has little or no
control” (Yin, 2009, p. 13). This study employs multiple sources of evidence
to allow corroboration and augmentation of evidence (Yin, 2009) leading to
accurate and more convincing case study indings (Aliza, 2010). The main
sources of evidence for this study comprise of semi-structured interviews
with the relevant personnel involved with the BSC implementation in a GLC
that manage transportation infrastructure locally and overseas. Additionally,
cross-checking of the information is done against the company documents,
websites information, and company annual reports. The semi-structured
interviews consisted of open-ended questions based on the interview
protocol as suggested by related literature on PMS, BSC and GLCs. The
interviews covered context and practices, and the critical success factors
that inluenced the implementation of BSC within the case irm. Participants
included accountants, middle managers as well as top managers. 14 key
personnel from different divisions and hierarchical levels, and who were
also actively involved with the BSC adoption in the company participated in
a series of semi-structured interviews conducted at the company’s premise.
The data was recorded and the process was facilitated by interview protocols.
Table 2, shows the list of interviewees involved in the case study.
Table 2: List of Interviewees
Average
Period of No. of Interviewee’s Total inter-
interview
interviews interviews Position view hours
hours
November 2010 - 5 General 21.15 7.15
May 2011 Managers
7 Senior 10
Managers
2 Senior 4
Executives
41

The GLC selected for this study has been running a successful business
locally and internationally. This company was chosen because it provided a
good illustration of the key issues that affected the implementation of BSC.
Other rationales for the selection of the case company are as follows. Firstly,
the case company is one of the highly proitable GLCs, which operates a
transportation infrastructure in Malaysia. Secondly, the company had won
the Malaysian NAfMA (National Award for Management Accounting)
2009 and 2011 award due to their extensive use of Management Accounting
Tools including the BSC. The case company had already implemented
BSC for a number of years. Thirdly, the company was easily accessed by
researchers in the past.
Despite the weaknesses in terms of statistical generalizations, this case

study proffered opportunities for in-depth observation and an analysis of
the PMS, particularly the BSC.
This study does not intend to examine the relationship between BSC
implementation and organisational performance. However, the current
study focused on the implementation process and the critical success factors
which may inluence the BSC implementation.
findings
Background of the Case Company
The case company referred to hereafter as Geomotion2 is a Malaysian

Government-linked Company (GLC), with Khazanah Nasional as the major
shareholder. It has a market capitalisation of RM 51.27 billion. Geomotion
was previously a public service entity involved in the transportation
infrastructure. It is now one of the world’s largest private transportation
infrastructure operators, as well as the retailers of duty free and non-dutiable
goods, agriculture, and horticulture and hotel management and is listed
on the Main Board of Bursa Malaysia (formerly known as Kuala Lumpur
Stock Exchange).
42

The BSC Implementation
It is generally agreed that PMS improves the decision-making processes

of an organisation as decisions and strategies are made only after the data
collected are processed and analysed to give a succinct overview of the
company (Gimbert, Bisbe and Mendoza, 2010).
Prior to the adoption of the BSC, the company implemented some general
performance indicators (KPIs). The KPIs covered broad-ranging areas which
employees or heads of department were expected to improve. However, the
implementation of the previous general KPIs was considered problematic
as the guidelines were not adequately speciic and the measures were not
precise.
Besides, the dissatisfaction and confusion regarding the old PMS, and the
“backward looking” inancial measures, Geomotion decided to change
and consequently adopted a PMS which was considered to be more
comprehensive, and which integrated the aspects of noninancial measures.
Hence a new measurement system, namely the BSC was adopted in place
of general KPIs to evaluate and improve performance. The BSC was a
customized version of the generic BSC as developed by Kaplan and Norton
(1996). BSC is widely recognised as being more speciic and clear as a
performance measurement instrument.
Examination on the BSC related document within the case irm shows
that the BSC was chosen among other PMS models due to its ability to
monitor and assess current performance of the case company. The company
believed that BSC help them to focus on areas that need rectiication. In
line with the literature, the company agreed that the BSC implementation
has signiicantly guided them in making better decision. In support of this,
an interviewee commented:
“In my opinion, to stay proitable and improve our performance,

we need a comprehensive management system, as it helps us to
focus.”
At the beginning of each year, Geomotion embarked on the irst stage of

its KPIs and BSC efforts. These were based on the Strategic Objectives
43

and targets which had been set. The KPIs included both inancial and
noninancial measures. Examples of inancial KPIs were the requirement
to achieve a targeted Return on Equity (ROE), Earnings before Interest,
Tax, Depreciation and Amortisation (EBITDA), while Employee Training
Hours and Employee Engagement Index were noninancial KPIs.
Based on the company’s vision and mission, Geomotion set the core strategy
by focusing on the revenue-generating initiatives and the enhancement of
the company’s operational and inancial competencies. These strategies
were then linked to the company’s strategic objectives, which were aimed
at targets to achieve to ensure their success. These strategic objectives are
usually set at the beginning of the year as a guide to developing the KPIs. The
strategic objectives of Geomotion highlighted the optimal use of resources,
company expansion, continuous improvement and increasing employee’s
job satisfaction. Geomotion believed that its BSC framework gave the
company a new direction and helped it achieve the targeted goals. Such
optimism as was relected in the case company is supported by Bolívar et
al., (2010) who have found that BSC can prevent a company from being
derailed from its target. Once KPIs have been set and deined, they will
subsequently be translated into the BSC. As KPIs represent a set of measures
highlighting the vital aspects of organisational performance for the current
and future success of the organisation (Parmenter, 2010), they allow the
assessment of objectives achievement (Ferreira and Otley, 2009).
These KPIs were delegated to the designated employees in the company.

The senior management team was responsible for the implementation of
the company’s strategic plan, which would be reviewed by the Managing
Director, subjected to approval by the Board of Directors before it was
allowed to cascade down to the division and department levels.
Following the prescribed BSC framework, Geomotion’s BSC was also

categorized into four perspectives, and its scores were subsequently reported
to the management, employees, external parties and the public. The BSC
is used by all levels of management, starting with the Managing Director
who owned the BSC; this was followed by the other irst level managers,
and subsequently down to the head of units and departments. Apart from
having speciic KPIs for each individual department/unit, Geomotion also
44

had some common KPIs that had to be achieved, such as the number of
training hours to be fulilled in a year.
BSC-related rewards are based on the company’s annual bonus which

hinges on the company’s budget and proitability. The rewards accorded are
based on the KPIs achieved. With regard to this company, the company had
established a PMS with all the related KPIs to be achieved by the employees.
As in BSC where the employee is appraised based on the achieved KPIs,
Geomotion also assessed the employee based on behavioural competency
namely Employee Competency, which includes leadership talent and peer
review assessment. Besides that, Geomotion had also incorporated the
human element especially with regard to the awarding of bonuses.
Discussion on the Flow of the Balanced BSC
Learning and growth

In the BSC implementation, Geomotion learning and growth perspective
focused on developing highly competent personnel through training, and
also sending its staff to attend courses in their related ields. Such steps
were aimed at ensuring that employees were knowledgeable and aware of
the new developments in their respective ields so that they could become
more eficient. Through nurturing and developing capabilities of the
personnel, Geomotion’s had established a knowledge management culture
within the irm.
Internal business process

Geomotion focused on having an eficient process management especially
through its Continuous Improvement Process (CIM) initiatives. At the
same time it strove to have strong inancial discipline, practising a win-
win stakeholder relationship without compromising its social obligations.
Furthermore, it also endeavoured to increase the market share by expanding
locally and internationally. At the same time with the guidelines from the
many coloured books of the Government-linked Companies Transformation
Programme (GLCTP), it strove to transform the company from an airport
operator to a World Class Airport Business.
45

Customer
For this perspective, the company focused on exceeding customer
satisfaction through medium such as the Airport Service Quality Survey
Award. This survey is conducted by the case irm on a yearly basis of which
the respondents consist of airline operators who use the services offered by
the company. Geomotion believed that by doing so, the company would
enjoy a good image and strong customer base, and in the long run, would
translate into better inancial performance.
Financial
For the financial perspective, having taken into consideration the
implementation of learning and growth, internal business process and
customer perspectives, the company aimed to improve its proitability and
cash low, effective portfolio management and most importantly to achieve
its headline KPIs (ROE, EBITDA) as announced to Bursa Malaysia.
Critical Success Factors of BSC Implementation
Many researches have tried to establish the critical success factors in

implementing BSC. Case evidence in Geomotion indicates that four
critical factors are found to be the critical success factors in the successful
implementation of BSC. These factors which consist of (1) top management
commitment, (2) communication, (3) information technology, and (4)
organisational culture are discussed in the subsequent section.
Top management commitment

The importance of top management commitment is recognized as one of
the variables of NAFMA’ Best Practice Framework (Suzana, Normah, &
Ibrahim Kamal, 2006). From the review of the company’s BSC low chart, it
was found that the senior management is responsible to review and monitor
the progress and issues of BSC implementation.
Top management commitment is vital to Geomotion’s efforts in the

BSC implementation. The top management’s commitment to adopt and
incorporate new techniques and management tools will facilitate the
initialization of the scheme and its subsequent implementation. In the case
of Geomotion, the top management is of the view that it needs to give
full support and commitment to the BSC implementation since they are
46

entrusted to be the caretaker of nation’s treasures and public funds should be

safeguarded. For example, during the development of KPIs, the Managing
Director (MD) had instructed that all the GMs must be part of the review
committee of the BSC process and framework. The impact of the MD’s
commitment to improving performance as well as its integration in the
Transformation programme is relected in his issuance of new directives.
Further, in terms of socializing the corporate score cards to the organisation
wide, the top management has always given priority to the Transformation
Management Ofice (TMO) over other things whether to hold a meeting or
discussion regarding the BSC. As echoed by one of the informants:
“Any matter related to the BSC is always given priority. And in

terms of introducing new changes like, for example, the PMS,
the MD is always present at the cascading sessions. He also
participates throughout the session.”
A study by Duh, Xiao and Chow (2009) concurs with this indings of the
study that effective top management support played a vital role in the
successful implementation of PMS in a Chinese company. Aliza (2010)
in her study found that the implementation of a Management Accounting
tool was strongly supported by the top management, evidently through
proactive roles and encouragement of knowledge building. The MD has
effortlessly strives to improve business process by using various continuous
improvement tools. Thus, having an eficient, supportive and dynamic top
management also helped Geomotion in the BSC implementation since they
are able to clearly communicate the BSC mandate to irm-wide.
Information Technology (IT)

Geomotion believed that the low of information was essential in the BSC
implementation. Hence, the company built a common IT infrastructure
with automated and standardized structures and systems throughout the
organisation. Information technology has helped create an informed
environment among the employees. Information is delivered mostly through
the intranet (Lotus Notes) or the company’s portal. The portal is utilized
for the sharing of information, making announcements and also for giving
encouragement and motivation to employees. The MD also interacts with
the employees through the portal. For example, he would email news
related to the company which has been highlighted in the print media to
47

the staff. The frequent interactions between the MD and the employees
make the employees feel that the MD is visible. Geomotion also set
up the own portal which is managed by the corporate communications
department. The portal is an in-house product, and the company is proud
to have established the portal for the use of its employees. The interactive
portal allows employees to be in the know of what is happening, i.e. they
are kept informed or updated regarding current events in the company. As
one of the managers in the Transformation Ofice mentioned:
“Whenever an employee opens his laptop and clicks on Internet

Explorer, that portal will irst pop up… he can read the current
news happenings in the company. I would say it is really an
interactive website”.
The portal was developed in 2010 as part of the knowledge management

system to park information in K-ofice. K-ofice which is embedded in
the employees’ email allows frequent interaction among the staff; hence
the sense of togetherness and belonging has developed and offers a unique
understanding of BSC importance among the employees. The information
technology infrastructure helped to speed up communication, resulting in
faster progress and implementation of BSC. Effective communication is
believed to be crucial to successfully implement BSC in the company.
Geomotion believed that communication via other modes and face-to-face

also played a very crucial role in increasing the employees’ understanding
of the signiicance of the Corporate Scorecard, and thence the importance
of achieving the KPIs embedded in it. This belief is shared by Worley
and Doolen (2006) and Ryan et.al (2008). According to these researchers,
effective communication helps to make organisational change a reality.
Ensuring each employee understands the importance of BSC, the HR
Senior Manager of Geomotion says that effective information is crucial
for the company’s success especially when it involves the introduction of
“new” initiative.
Communication
The need to have a clear communication between the top management and
the employees is substantial (Assiri, Zairi and Eid, 2006; Niven, 2002;
Rahman and Hassan, 2011). Channels of communication play a role in the
48

implementation of BSC, so that everybody will have the common terms of

understanding of the company’s vision. Case evidence suggests that initially
the company faced dificulties in communicating the BSC ideas to their
employees. However, this was countered by the effective formulation of the
company’s communication plan involving the use of information technology
to disseminate timely information. It was revealed from the case company’s
communication plan that communication plan varies from having programmes
such as the awareness sessions, HR bulletins (quarterly publication) and HR
for you (monthly publication). Besides, the company organises trainings,
workshops, and seminars to make sure that all the employees are well versed
with the company’s BSC. This shows that the mass media communication
has a signiicant role in the BSC implementation.
Additionally, the interpersonal communication channel is also important.

Communication regarding the Corporate Scorecard’s implementation was
conveyed by the head of unit/department through departmental meetings
and discussions. Communication is essential to reach out to employees.
To maintain contact with the large number of employees, Geomotion
held various programmes such as visiting other airports operated by
the company, giving talks, opening up booths either at the headquarters
ofice or the subsidiaries’/ branch ofices. These were done to ensure that
other subsidiaries in the company understand and will work towards the
achievement of the KPIs set by the parent company.
Hence making everybody understand the importance of BSC implementation

was essential, especially when they knew the beneits they would gain if
they worked collectively to achieve the perspectives embedded in the
company’s BSC, such as bonus and salary increment. The company
believed that effective communication enabled employees to understand
the need to perform effectively by working as a team. It also ensured that
their employees were supportive of the management’s initiatives. Through
frequent interactions, their employees accepted the changes brought in by
the management of the case company.
Geomotion believed that communication via other modes and face-to-face

also played a very crucial role in increasing the employees’ understanding
of the signiicance of the BSC, and thence the importance of achieving the
KPIs embedded in it.
49

Change of organisational culture

Being a public service entity then, the work culture of the company was more
of a silo culture. However, it was felt that for an organisation to survive and
perform well there had to be a free low of information among the employees.
Nevertheless, even though the company still had a few employees who were
initially entrenched in the old culture of the previous entity, it managed
to transform their work culture into high performance with the injection
of new and fresh blood from the corporate sector, bringing with them the
commercially driven culture. This group of people eventually embraced the
culture of change, as they had come to understand that it is important for
everybody to change the work culture so as to achieve the national agenda.
For example, according to the Senior Manager of Human Resource:
“Initially, the senior staff would indirectly show their resistance

towards the extra work, but slowly they learn to adapt, especially
when they see the junior are okay with it… now they can adapt
to the culture.”
Another factor that had contributed to the change of culture was the
exchange of staff between different transportation infrastructures. The
staff from a transportation infrastructure in South Korea participated in
the programme which was under the company’s learning and growth
perspective. The company also sent its employees to other transportation
infrastructure organisation like South Korea for exchange programme to
allow the employees to learn and adopt the eficient work culture of the
Koreans. The company also introduced Knowledge Sharing Session (KSS)
as part of the change culture. Another important milestone that facilitated
the change of culture was the change of the company’s vision and mission
through the establishment of Cross Functional Team3 (CFT) comprising
personnel from different divisions who had to work interdependently. The
CFT was formed as part of the Transformation initiatives whereby the irst
thing the company did through this team was changing the vision of the
company from focusing on airport services to airport business. This change
brought along the change of culture of performance which will subsequently
translate into organisational performance.
50

Since the company had aimed to be the regional leader in the airport
industry its employees need to change their mind set. The inding from the
current study contradicted with the inding discovered by Norhayati and
Siti Nabiha (2009) about the dominant public service culture present in the
Malaysian GLC.
Conclusion
This case study indicates several signiicant indings. First, the evidence
from Geomotion showed that the company had implemented PMS
throughout the organisation. Nevertheless, the type of PMS used has
changed from general KPIs to a more focused set of KPIs that follows the
BSC perspectives but was tailored to its unique settings as a GLC.
These indings are consistent with the recommendations by PMS researchers

who advocate the use of a mixture of inancial and non-inancial measures in
PMS. Hence Geomotion could be considered a role model for other GLCs
for having successfully implemented the BSC to enhance performance.
Parallel with the indings of Daniel, Myers and Dixon (2008) and Assiri,
Zairi and Eid (2006), the evidence gathered thus far, concludes that top
management commitment is the most inluential factor that facilitates the
BSC implementation.
However, these indings should be carefully considered, given the need to

have a more robust empirical investigation in conirming these indings in
a bigger population. First, the case study was only done on a single GLC;
therefore the indings are not conclusive in representing GLCs. Thus, future
research should increase the number of companies as case companies, hence
enabling richer indings. Future research could also investigate other factors
that might inluence the success of BSC implementation.
Note:
1. National Award for Management Accounting (NAfMA) was designed

to encourage organizations in Malaysia to adopt modern management
accounting approaches where it is believed they can improve the
51

quality of managerial decision-making (Suzana, Normah, Ibrahim

Kamal, 2006)
2. The name of this case company is withheld to maintain conidentiality.
3. Cross Functional Team (CFT) comprises of a group of people,

identiied by the HR and the respective division, whereby they are
given the target and the CFTs members has to identify the initiative
and ways how to achieve the targets.
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57

BuSINESS STrATEGy, STrATEGIC
rOlE Of ACCOuNTANT, STrATEGIC
mANAGEmENT ACCOuNTING ANd
ThEIr lINKS TO fIrm pErfOrmANCE:
AN ExplOrATOry STudy Of
mANufACTurING COmpANIES IN
mAlAySIA
Tan Ah Lay
Ruzita Jusoh
University of Malaya, Kuala Lumpur, Malaysia
Abstract
Despite that there is no agreed theoretical framework for strategic

management accounting (SMA), the academics generally agree that SMA
is external long-term focused, assists managers in the strategic decision-
making process. This exploratory study investigates the mediating effect
of SMA on the relationship between Porter’s (1980) competitive strategy
and firm performance. The contingency model incorporates the two
dimensions of SMA, i.e. the usage of SMA techniques and the changing
role of accountants in the strategic decision-making process. The results
of partial least squares appear to support SMA usage mediates partially the
relationship between product differentiation strategy and irm performance.
There is also a positive relationship between business strategy and strategic
role of accountant. However, it is unable to ind support on the positive
association between strategic role of accountant and irm performance.
Key words: business strategy, strategic management accounting and

management control systems.
*corresponding author

Introduction
Traditional management accounting has been dependent on redundant

assumptions dealing with manufacturing process and fails to respond to the
changing competitive and manufacturing environment. This has resulted in
a situation that management accounting systems are considered no longer
relevant to the changing environment and is counter-productive to good
management decision-making (Bromwich and Bhimani, 1989; Otley, 2001;
Drury, 2004).
In calling for the use of new management accounting techniques, Simmonds

(1981) irst coined the term “strategic management accounting” (SMA).
But it was not taken seriously until the late 1980s (Otley, 2001). About
the same time in USA, inluential academics such as Robert Kaplan,
Robin Cooper and John Shank also urged to improve the relevance of
management accounting (Langield-Smith, 2008). SMA involves numerous
new techniques which are long-term, future-oriented and externally focused
(Bromwich and Bhimani, 1989; 1994; Wilson, 1995; Roslender and Hart,
2003). The strong advocates of strategic management accounting are
Simmonds (1981), Shank (1989), Bromwich (1996), Roslender (1995) and
Kaplan and Norton (1992). Most of their work is inluenced by Porter (1980;
1985) who introduces value chain analysis and ive competitive forces in
formulating and implementing strategy to achieve above average returns
in the long term via sustainable competitive advantage.
Since then, there were much interests expressed on the use of SMA but
the empirical studies on the effectiveness in using these techniques have
been scant. Langield-Smith (2008) inds no compelling evidence to wide
adoption of SMA. Roslender and Hart (2010) also lament that there is no
consensus on the meaning of the term “SMA” 30 years after it was coined
by Simmonds (1981). They remark that similar to market orientation which
is the responsibility of all departments, SMA shall no longer be seen to be
an exclusive accounting function. Meanwhile, Cadez and Guilding (2008)
use two dimensions of SMA (strategically oriented management accounting
techniques and strategic orientation of accountants who participate in the
decision-making process) in their study to examine SMA’s mediation effect
on the relationship between business strategy and irm performance. In the
past, much of the research in SMA has concentrated on which accounting
60

techniques and in the circumstances in which they are used (Tillmann and
Godddard, 2008).
In Malaysia, management control is still dominated by the use of inancial

accounting and there is minimal adoption of innovative management tools
even for large companies (Smith, et al., 2008). It is encouraging to note
that an exploratory study carried out recently on electrical and electronics
companies operating in Malaysia shows the extensive usage of SMA
information elements (Noordin, et al., 2009). Competitor information,
customer information and production related information are regarded as
SMA elements which are very important for organizations operating under
intensiied competitive market.
The main objective of this study is to advance the understanding of mediating

effect of SMA (Cadez and Guilding, 2008) on the relationship between
business strategy and irm performance. This is in line with Chenhall’s
(2003) suggestion on the study of contemporary settings as little contingency
work was carried out on balanced scorecard, target costing, life cycle costing,
which come under the broad array of non-inancial performance indicators.
Malaysia aims to be a progress and high-income nation by year 2020, able to
compete on a regional and global stage, attract investment, drive productivity
and innovation (source: Tenth Malaysia Plan 2011-2015). In tandem with the
strategies set out in the Plan to achieve sustainable growth, it is important to
understand whether the use of strategic tools such as strategic management
accounting can improve Malaysia’s competitiveness in the global market.
The indings of this study will be beneicial for the corporate managers and
policy- makers in Malaysia.
The remainder of the paper is structured in six sections. Next section

covers literature review and followed by hypotheses development.
Research method and results are presented in section three and section four,
respectively. The ifth section provides a review of the salient points of
the study and discussion of indings and limitations, and the inal section
presents the conclusion and recommendations for future research.
61

literature review
Strategic Management Accounting
Management accounting systems are formalized information systems used

by organizations to monitor the behavior of their managers that leads to
the attainment of organizational goals. Traditional management accounting
is typically limited to providing inancially oriented information and is no
longer relevant to the changing environment and is counter-productive to
good management decision-making (Bromwich and Bhimani, 1989; Otley,
2001; Drury, 2004). In view of the weaknesses in traditional management
accounting, the advocates of SMA have strongly suggested that irms
operating in the competitive environment adopt the advanced management
accounting techniques (Simmonds 1981; Shank 1989; Bromwich 1996;
Roslender 1995; and Kaplan and Norton 1992).
Bromwich and Bhimani (1989; 1994), in their CIMA Reports, stress the
importance of qualitative and non-inancial measures in manufacturing
activities. Management accounting needs to become more externally
focused to enable the enterprise to look outward to the inal goods market.
They recommend the use of attribute costing to value the product attributes
that appeal to the customers. Instead of employing a traditional absorption
accounting approach, Kaplan initiates activity-based costing (ABC) which
is based on the principle that it is activities and not products that give rise
to costs. This approach eventually became activity-based management
(ABM) which is capable of identifying and implementing opportunities
for improvements in proitability, eficiency and quality within an entity
(Roslender, 1995). Shank (1989) proposes the blending of three themes:
value chain analysis, strategic positioning analysis and cost driver analysis
from the strategic management literature to become a framework called
‘strategic cost management’ (SCM). Since strategy and vision are of
signiicance to all the stakeholders in the organization, Kaplan and Norton
(1992) developed a new performance measurement system called Balanced
Scorecard which takes into consideration the necessity of customer, internal
business and innovation and learning perspectives alongside a inancial
perspective, and deining future orientation. Roslender (1995) treats SMA
as a “generic approach to strategic positioning” which encompasses Porter’s
competitive advantage theory and his strategic cost analysis. Roslender
62

and Hart (2002) propose a framework to advance the potential of SMA by

integrating management accounting with marketing within the strategic
management framework, and suggest a new concept in the form of brand
management accounting.
Eventhough that there is no agreed theoretical framework for SMA, in this

study SMA is regarded as broad scope, i.e. external, non-inancial and future
oriented (Bromwich, 1996; Wilson, 1995; Roslender and Hart, 2003) and a
sub-set of management control systems (MCS). Broad scope information
systems are found to be more suitable for irms employing a strategy of
continuous product/market development and innovation than in irms which
have stable product/market (Abernethy and Guthrie, 1994; Hoque, 2004).
Strategic Role of Accountant
SMA accounting information system requires demand information and all

the internal and external data for strategic cost analysis. This suggests the
important role of management accountants in helping to provide information
for strategic decision-making and strategic control (Bromwich 1996). The
increasing globalization of business over the last two decades and the
speed of technological change have also profoundly affected the role of
management accountants (Burns and Baldvinsdottir, 2007). As uncertainty
increases, pre-planning will eventually become harmful to performance
and organizations require the interaction of accountants and managers to
determine appropriate courses of action (Chapman 1998). Using a case study,
Lambert and Pezet (2010) argue that management accountants’ involvement
in monthly performance review meetings is proof that they are becoming
the producer of truthful knowledge. Strategic decision-making process
involves “the scanning of the environment to gather data and making sense
of it by developing cognitive models and building mental representations
that guide managers’ thinking and the direction of their decisions” (Bonn
and Fisher, 2011 p.7 ). With their expertise and experience, it is imperative
that management accountants participate in the strategic decision-making
process and enhance the irm’s effectiveness.
63

Strategy
Strategy is one of the important contextual variables in the management

accounting research using contingency approach (Chenhall, 2003). Mintsberg
(1987) which deines ive Ps of strategy. “Strategy is a plan (intended), a
pattern (realized), a position (a strong presence in a particular market), a
perspective (doing things a unique way), and ploy (a speciic maneuver
intended to outwit a competitor)” (Abraham 2006, p.172). According to
Mintzberg and Waters (1985), deliberate and emergent strategies may be
conceived as two ends of a continuum which real-world strategy lies. It is
unlikely to ind any perfectly deliberate strategies in organizations. They are
of the view that highly deliberate strategy-making processes will be found
to drive organizations away from prospecting activities and towards cost
leadership. Some writers have questioned the effectiveness of traditional
MCS in an organization which tends towards emergent strategy formation
(Lord, 1996).
Prominent business-strategy typologies identified are: prospectors-

analyzers-defenders (Miles & Snow, 1978), build-hold-harvest (Gupta
and Govindarajan, 1984) and product differentiation-cost leadership-focus
(Porter 1980; 1985). These typologies have caused much research interest
in strategy-MCS relationship (Langield-Smith, 1997; Chapman, 1997).
To ensure long term proitability and sustainable competitive advantage,
Porter (1980; 1985) claims that a irm must make a choice between one of
the generic strategies (cost leadership or differentiation) rather than end
up being “stuck in the middle” (Allen and Helms, 2006). These strategies
are mutually exclusive. However, some researchers question the accuracy
of prediction propositions of strategies identiied by Porter (1980; 1985)
in this era of high competition and globalization (Campbell-Hunt, 2000;
Parnell, 1997). Some studies ind “pure” strategies (i.e. cost minimization
or differentiation) are associated with superior performance (Dess and
Davis, 1984; Hambrick, 1983). Numerous researches have linked each of
Porter’s generic strategies to business performance in emerging nations
(Parnell, 1997; Jusoh and Parnell, 2008; Parnell, 2011). But other studies
also conclude that combination strategies (i.e. low cost and differentiation)
are optimal (White, 1986; Hill, 1988; Miller and Dess, 1993; Kumar and
Subramanian, 1997).
64

This study focuses on “pure” strategies since combination of strategies

can be associated with either inferior or superior performance (Parnell and
Hershey, 2005). It is also dificult to adopt combination (or hybrid) strategies
as managers may need different kind of resources and dificult-to-manage
organizational structure (Pertusa-Ortega et al., 2009).
Hypotheses development
Based on past research, Jermias and Gani (2004) developed a hypothetical
relationship between competitive strategy, organizational design,
management accounting system (MAS) and business unit performance. On
the one hand, product differentiating companies expect to beneit more from
using decentralized organizational structure more behavioral control and use
more MAS that enhance companies’ ability to differentiate their products to
satisfy their customers. On the other hand, cost leadership companies will
beneit from using a more centralized organizational structure, emphasizing
more on output control, using more MAS that enhance companies’ ability
to control costs.
The contingency model proposed in Figure 1 demonstrates how irm

performance is enhanced by competitive strategy (Porter, 1980, 1985)
through mediation of the accountants’ participation in strategic decision-
making process (strategic role of accountants) and usage of SMA techniques.
From the potential contingency variables, the paper restricts itself to
consideration of the inluence of strategy and two dimensions of SMA on
irm performance.
Strategic role of
accountant X2
H1a H1b
Business strategy Firm

Differentiation performance Y
Cost leadership X1
H2
H3a
SMA usage H3b
X3
Figure 1: Hypothesized Path Model
65

Usage of SMA and strategic role of accountants are assumed to function

individually as a mediator to the extent that each of them accounts for the
relation between the predictor (strategy) and the criterion (performance)
(Baron and Kenny, 1986). Gerdin and Greve’s (2004) mediation model of
the Cartersian-contingency approach acknowledges it may exist when the
impact of independent variable (X1, e.g. strategy) on dependent variable (Y,
e.g. performance) operates through a mediating variable (X2, e.g. MAS).
Strategy - Strategic Role of Accountant - Performance
Porter (1980; 1985) contends that a firm can attain above-average

performance if it possessed one of the two basic competitive strategies (cost
leadership or differentiation). Cost leadership strategy stresses internal
eficiency, protection of domain, and low cost relative to competitors.
Such irms are likely to focus on minimizing unproductive organizational
processes. Firms following product differentiation strategy emphasize on
growth, innovation and learning and are interested in external expansion to
achieve proitability. They will focus on value creativity and create a product
or service recognized industry wide as unique (Kumar and Subramanian,
1997; Dess and Davis, 1984).
Furthermore, strategic decision-making process requires wider participation

to improve decision quality as it draws on wider information sources.
Management accountants’ involvement in strategic decision-making process
is crucial as they have the ability to collect internal and external information,
whether inancial or non-inancial, and setting desired objectives and
direction (Louis, 2011). Past research also conirms that there is a positive
relationship between middle management involvement in strategy and
organizational performance (Floyd and Wooldridge, 1992; 1997). Hence, it
is envisaged that irms may attain competitive advantage if the accountants
are involved in the strategic decision-making process.
Middle level managers are found to involve in four strategic activities in

the organizations, two upward (championing alternatives and synthesizing
information) and two downward (facilitating adaptability and implementing
deliberate strategy). Empirical research conirms a positive relationship
between middle management involvement in strategy and organizational
66

performance (Floyd and Wooldridge, 1992; 1997). In the same vein,

management accountants, being middle level managers, may have the
capability to mediate the relationship between business strategy and
organizational performance.
In fact, accounting plays a major role in helping firms to formulate

differentiation strategy or cost leadership strategy (Bromwich, 1996).
For example, accountants need to perform strategic cost analysis in order
to cost product characteristics or attributes which in turn contributes to
Porter’s (1980) differentiation strategy. Accountants must also be involved
in modeling the cost structure of competitors which contributes to Porter’s
(1980) cost leadership strategy (Bromwich, 1996; Lord, 1996).
However, some researchers disagree that team-based structure results

in performance improvement or management accountants have been
accepted to perform their strategic role in most organizations (Chenhall
and Langield-Smith, 2003; Chenhall, 2008). Cadez and Guilding (2008)
also fail to support the claim that accountants’ participation in strategic
decision-making process can enhance performance. But management
accounting has changed its direction to strategic thinking and helping in
formulating business or corporate strategy in the age of globalization.
Hence, management accountants, as transformational leaders, are also
playing their roles in ensuring sustainable growth (Mia and Ahmed, 2005).
It is anticipated that strategic role of accountant mediates the relationship
between business strategy and irm performance as relected in the following
hypotheses.
H1a: There is a positive relationship between business strategy and strategic

role of the accountant.
H1b: There is a positive relationship between strategic role of the accountant

and irm performance.
H1c: Strategic role of the accountant mediates the relationship between

business strategy and irm performance.
67

Strategic Role of Accountants – SMA Usage
When the accountants are involved in the design and implementation of MAS
together with the sub-managers according to their needs, it may encourage
higher usage of the system (Abernethy and Bouwens, 2005). Accountants
play an important role in costing the characteristics or attributes possessed
by the product in strategic planning and modeling the cost structures of
competitors (Bromwich, 1996). Hence, when accountants are actively
involved in providing cost information for strategic decision-making, it
may result in higher usage of SMA. In a similar vein, Simmonds (1982)
asserts that management accountants are the ideal people to collect and
analyze external data that is relevant for strategic management. Management
accountants with a business unit orientation tend to be more innovative
on accounting system design than those with a functional (accounting)
orientation (Emsley, 2005). Interestingly, Cadez and Guilding (2008) ind
usage of SMA higher when the accountants are involved in the strategic
decision-making process.
Moreover, management accountants with requisite skills and business

acumen can communicate well and can inluence line changes (Anderson and
Lanen, 1999). They should be able to provide: (1) much more qualitative
information, (2) more future-oriented information, (3) broader range of
information, (4) information on a much timely basis and (5) information
on the implementation process, progress toward strategic objectives and
deviations from plans (Brouthers and Roozan 1999). As such, management
accountants can have an impact on the usage of SMA.
From the foregoing discussion, it can be concluded that the strategic role
of accountant can have a positive impact on the usage of SMA techniques
as shown by the following hypothesis.
H2: Strategic role of accountants positively correlates SMA usage.
Strategy - SMA Usage - Performance
Strategy has to be supported by appropriate control systems, organizational

structure and management information systems to achieve competitive
advantage and ensure high organizational performance (Jermias and Gani
68

2004; Chenhall and Langield-Smith 1998). In view of uncertain external

environment managers used new and advance management accounting
techniques to support their decision needs and assist them to monitor
progress against their strategies (Baines and Langfield-Smith, 2003;
Waweru, 2008; Chenhall and Morris, 1986; Abernethy and Guthrie, 1994).
Broad scope information systems are found to be more effective in irms
employing a strategy of continuous product/market development and
innovation (prospectors) than in irms which are protecting a comparatively
narrow and stable product/market (defenders) (Abernethy and Guthrie, 1994;
Hoque, 2004). Broad scope information systems allow managers to obtain
information necessary to make successful economic decisions in the long run
(Hoque, 2006). The use of non-inancial MAS information, the interactive
use of MAS and the use of MAS for resource allocation seem to support
lexibility strategy implementation (Naranjo-Gil and Hartmann, 2006).
Chenhall and Langield-Smith (1998) discover that higher performing irms

that place a strong emphasis on product differentiation strategies gain high
beneits from management accounting practices such as: benchmarking,
employee-based measures, strategic planning techniques and balanced
performance measures. In contrast, higher performing irms that place a
strong emphasis on low price strategies gain high beneits from management
accounting practices such as: traditional accounting techniques and activity-
based techniques. Prospector irms make greater use of customer-focused
accounting and competitively-oriented analysis. Non-inancial measures
will also be beneicial to irms applying “build” strategy (Guilding, 1999;
Govindarajan and Gupta 1985 cited in Jusoh and Parnell, 2008). The
innovativeness of differentiation irms is similar to that of prospectors
and ‘build’ irms (Langield-Smith, 1997). Ittner and Larcker (1997) ind
benchmarking (one form of SMA technique) has little association with
the performance of irms in computer industry but a positive effect on the
performance in the automotive industry. Kennedy and Afleck-Graves
(2001) discover irms adopting activity-based costing (ABC) techniques
outperformed or matched non-ABC irms. Malina and Selto (2001) ind
balanced scorecard creates strategic alignment, effective motivation and
positive organizational outcomes.
The cost leadership strategy requires that product lines remain rather stable
and a strong emphasis on formal proit and budget controls in order to
69

keep costs and prices at a minimum (Miller, 1988; Govindarajan, 1988;

Bruggeman and Van der Stede, 1993). Differentiation strategy encourages
creativity and innovation, and has to rely on control through coordination
(loose controls) rather than formal controls (Langield-Smith, 1997). In
formulating and implementing a product differentiation strategy to overcome
competitive threats, company requires an accurate approximation of product
attribute costs, and monitoring these costs overtime (Mia and Clarke, 1999).
Amir et al., (2010) also ind support that differentiation strategy positively
inluences the use of contemporary performance measurement systems
attributes, namely, performance evaluation, benchmarking, timeliness and
scope. Furthermore, Porter (1980; 1985) suggests that competitor analysis is
fundamental to the pursuit of competitive advantage. To pursue a successful
differentiation strategy, it is necessary to have a range of reliable information
with double external focus on competitors’ value creation and customers’
value attribution chains (Roslender and Hart, 2002).
However, using Miles and Snow’s (1978) strategy types, Simons (1987) inds
irms that embrace a defender strategy use their accounting control systems
less intensively than those adopting a prospector (product innovation)
strategy. These prospectors would ind forecast data, setting tight budget
goals and monitoring outputs more important. Similarly, Guilding (1999)
inds that, relative to other irms, prospector irms make greater use of, and
perceive greater helpfulness in competitor-focused accounting practices.
Based on the latest management accounting literature, Cadez and Guilding

(2008) identiied 16 SMA techniques which can be classiied in ive broad
categories: costing; planning, control and performance measurement;
strategic decision-making; competitor accounting and customer accounting.
They claim that these strategically oriented management accounting
techniques mediates the relationship between prospector-like strategy
and irm performance. However, Cinquini and Tenucci (2010) ind some
SMA costing techniques are also associated with cost leadership strategy.
Likewise, Abdel-Kader (2008) is unable to conirm that irms following
differentiation strategy need a sophisticated cost system for better
measurement of diversiied product. Despite these mixed indings, SMA
is expected to be associated with product differentiation strategy and has
an impact on performance as stated in the following hypotheses.
70

H3a: SMA usage is higher in irms following differentiation strategy than

in irms following a cost leadership strategy.
H3b: SMA usage is positively associated with irm performance.
H3c: SMA usage mediates the relationship between differentiation strategy

and irm performance.
research method
Sampling Frame
The unit of analysis for the study is the strategic business units (SBUs)
of Malaysian public listed companies which have core business in
manufacturing. The selection of listed companies in Malaysia is based
on the ground that these companies have to comply with stringent Listing
Requirements and the Malaysian Code on Corporate Governance. The
directors of listed companies are expected to review quality information,
inancial and non-inancial, of their operations prepared by the management.
Hence, these companies should have more established management
accounting departments than unlisted companies. The use of companies in
manufacturing segment is speciic because this sector represents the most
commonly employed management accounting systems (Smith et al., 2008).
Historically, managers in service companies used management accounting
information less intensively than managers in manufacturing companies
(Kaplan and Atkinson, 1998).
A total of 430 companies engaging in manufacturing were selected from

around 1,000 listed companies throughout Malaysia. Full addresses and
contact numbers were obtained from the websites. Phone calls were made to
these companies to ind out the names of management accountants or heads of
accounts. Management accountants are chosen as respondents in this survey
since they are more knowledgeable about the irm’s management accounting
techniques, inancial performance measurements and strategic choice than
other operating managers. In Malaysia, all accountants are registered with the
Malaysian Institute of Accountants which require minimum tertiary education
and adequate working experience to be admitted as a member. It is probable
that they are more conversant in answering these organizational questions.
71

Survey and Respondents
Mail survey is selected for this study as it enables gathering of information

from a broad cross-section of irms at relatively low cost (Hoque, 2004).
The draft survey instrument was reviewed by three academics and pre-
tested on 30 accountants for clarity and face validity. Upon revision, the
instruments were sent with a personalized cover letter and a stamped return
envelope to the management accountants/heads of accounts of these 430
companies. After ive weeks a reminder was sent to those companies which
had not completed the survey. Mail questionnaires were received from 103
manufacturing companies (response rate 24%). The response rate is within
the range of recent mail surveys in similar academic research (Chenhall
et al., 2011; Parnell, 2011; Amir et al., 2010). The possible response bias
from early and late responses was tested using t-test. There is no signiicant
difference found in the results. The statistics of respondents in terms of
size in employees and annual sales, proportion of export sales, history of
responding irms and industry are presented in Appendix A. Descriptive
statistics of 103 samples obtained from mail survey are prepared by SPSS
Version 15.0 (Table 1).
Variable Measurement
Strategic management accounting (SMA) Instrument used by Guilding and

Mc Manus (2002) is applied to measure the degree of SMA techniques
usage. 16 SMA techniques are listed together with a Likert-type scale
ranging from “1” (not at all), to “7” (to a great extent). The respondents
were asked to indicate the extent their organizations make use of each of
these techniques. A glossary was provided to aid interpretation of these
16 SMA techniques which may be grouped into ive categories: costing
(attribute costing, life-cycle costing, quality costing, target costing, value-
chain/activity costing), planning, control and performance measurement
(benchmarking, integrated performance measurement), strategic decision-
making (strategic costing, strategic pricing, brand valuation), competitor
accounting (competitor cost assessment, competitive position monitoring,
competitor performance appraisal), and customer accounting (customer
proitability analysis, lifetime customer proitability analysis and valuation
of customers as assets).
72

Strategic role of accountant: The extent of the accountants’ involvement in

the strategic decision-making process is based on Wooldridge and Floyd’s
(1990) instrument to assess middle management involvement in strategic
decision-making using a Likert-type scale ranging from “1” (not at all
involved) to “7” (fully involved).
Business strategy: Business strategy was measured by using two of

Porter’s (1980, 1985) competitive strategies: product differentiation
and cost leadership. Porter’s competitive strategy is more theoretically
sophisticated than others (Miller, 1988), and receives more empirical support
from previous research than other constructs have and remains the most
commonly supported and identiied in key strategic management literature
(Allen and Helms, 2006). It was also cited in Govindarajan (1988) that
“Porter’s (1980) strategy framework conceptualization is academically
well accepted and internally consistent” (Dess and Davis, 1984; Hambrick,
1983). This study has not considered the third strategy “focus” identiied
by Porter (1980, 1985) as it is not about competitive advantage but about
market scope (Pertusa-Ortega et al., 2009).
Measurement scales developed by Narver and Slater (1990) were used

to operationalise the Porter’s competitive strategies. The respondents
were asked to express the extent the organization engaged in competitive
activities (product differentiation and cost leadership) using a Likert-type
scale ranging from “1” (not at all) to “7” (to a large extent).
Firm performance: Using a single proitability measure is no longer

suficient. Combining non-inancial measures with inancial measures can
be better indicators to judge the organizational processes and outcomes
(Jusoh and Parnell, 2008). Firm performance is measured according to 7
dimensions adapted from Gupta and Govindarajan (1984) and Chenhall and
Langield-Smith (1998). The questionnaire asked respondents to assess their
organization’s performance over the past three years, across 7 dimensions
on a 7 point Likert-type scale, ranging from 1(well below average) to
7 (well above average) in comparison with the industry average. The 7
dimensions are: ROI, sales growth, new product development, research and
development, customer satisfaction, cost reduction programs and human
resource development.
73

results
Structural Equation Modeling: Partial Least Squares
The hypotheses are tested using Partial Least Squares (SmartPLS 2.0,
Ringle, et al., 2005), a second generation statistical technique that allows
testing models with multiple independent, mediating and dependent
variables. PLS is more suitable for smaller sample sizes than covariance-
based techniques (Chenhall, 2005; Hulland, 1999) and in an early stage of
theory development (Henseler, et al., 2009).
A structural model in PLS technique identiies the relationship among

constructs while a measurement model speciies the relations between
the indicators and the constructs that they represent (Chenhall, 2005). A
measurement model may have relective indicators or formative indicators.
The formative indicators help to describe the constructs while relective
indicators are determined by the constructs. Based on the nature of measures
used in this study, the measurement model in this study is considered
relective as the underlying construct is relected or manifested by a series
of indicators (Bisbe, et al., 2007).
The results of relective measurement (outer) model should be assessed

with regard to their reliability and validity. The irst criterion is to check
for individual item reliability by examining the loadings (or simple
correlations) of the measures with their respective construct. A value above
0.7 is regarded as satisfactory. In general, items with loadings of less than
0.4 (a threshold commonly used for factor analysis results) or 0.5 should
be dropped (Hulland, 1999). All indicators have loadings above 0.6 in this
PLS test (Figure 2).
74

ASIA-PACIFIC.indd 75
Figure 2: Pls Measurement & Structural Model

3/13/2013 4:50:24 PM
To satisfy convergent validity, a set of indicators must represent one and

the same underlying construct. An AVE (average variance extracted) value
of at least 0.5 also indicates suficient convergent validity. Composite
reliability and Cronbach’s alpha must have an internal consistency reliability
value above 0.7, whereas a value below 0.60 indicates a lack of reliability
(Henseler et al., 2009; Hulland, 1999). Table 2 presents the results of
composite reliability and Cronbach’s alpha, showing all values exceeding
0.8. The AVEs of all latent variables are also above 0.6.
The cross loadings offer another check for discriminant validity. Cross
loadings of indicators for a respective latent variable should be higher than
the cross loadings of their correlations with other latent variables. The PLS
results conirm that cross loadings of indicators for each respective construct
are higher than other indicators. The discriminant validity can also be
assessed by comparing the square roots of AVE calculated for each of the
constructs and the correlations between different constructs in the model.
The square roots of AVE are all higher than the latent variable correlations
denoting discriminant validity (Table 3).
The structural (inner) model can be assessed by examining the coeficient of

determination (R2) of the endogenous (dependent) latent variables (Hulland,
1999). Chin (1998) describes R2 values of 0.67, 0.33, and 0.19 in PLS path
models as substantial, moderate, and weak, respectively (cited in Henseler,
et al., 2009). “Moderate” R2 may be acceptable if an endogenous latent
variable is explained by only a few exogenous latent variables (Henseler,
et al., 2009). A bootstrap procedure can be used to provide conidence
intervals for all parameter estimates. R2 value of PLS model is presented
in Table 2. Table 4 shows the path coeficients among latent variables and
their t values. Figure 2 presents the measurement and structural model of
PLS and Figure 3 illustrates the structural model as well as the signiicant
path coeficients among the latent variables.
Test of Hypotheses
The aim of this study is to determine the mediating effect of strategic

management accounting on the relationship between business strategy and
irm performance (Figure 1). The two dimensions of SMA are strategic role of
accountant (accountant’s participation in strategic decision-making process)
76

and SMA usage. The strategic role of accountant is hypothesized to have a

direct impact on SMA usage (H2). Business strategy is associated with the
two dimensions of SMA (H1a and H3a). Strategic role of accountants and
SMA usage are hypothesized to be associated to the irm performance (H1b
and H3b). By combining the earlier hypotheses developed, strategic role
of accountants and SMA usage mediate the relationship between business
strategy and irms’ performance individually based on the propositions of
Baron and Kenny (1986) (H1c and H3c).
Figure 3: Structural Model Showing Path Coeficients and R2 Values
The PLS results shown in Figure 3 illustrates business strategy

(differentiation/cost leadership) has direct impact on irm performance
(0.160, p<0.01; 0.209, p<0.01). SMA usage is positively associated with
differentiation strategy (0.480, p<0.01) but negatively associated with
cost leadership strategy (-0.096, p<0.05). SMA usage is also associated
with irm performance (0.181, p<0.01). Thus H3a and H3b are supported,
and SMA usage is deemed partially mediating the relationship between
differentiation strategy and irm performance (H3c is supported). Strategic
role of accountant positively associated with irms adopting business
strategy (0.302, p<0.01; 0.300, p<0.01). H1a is supported. Strategic role of
accountants also has a direct impact on SMA usage (0.178, p<0.01). Hence,
H2 is supported. H1b is not supported as strategic role of accountant has
a negative relationship with irm performance (-0.234, p<0.01). As such,
H1c (mediation effect of strategic role of accountants) is not supported.
77

Discussion of indings
This study aims to enhance the knowledge of strategic management
accounting. Motivated by the two-dimension approach of SMA introduced
by Cadez and Guilding (2008), the causal model considers the mediation
role of SMA usage and strategic role of accountant on the relationship
between business strategy and irm performance. The results of this study
appear to support the contention of Porter (1980; 1985) that if a irm adopts
either differentiation strategy or cost leadership strategy, it can enhance
irm performance. These indings are consistent with past research (Parnell,
2011; Pertusa-Ortega, et al., 2009). Differentiation strategy has a signiicant
direct impact on irm performance (0.160, p<0.01). Likewise, cost leadership
strategy has a signiicant direct impact on irm performance (0.209, <0.01).
In this study, SMA (contemporary accounting techniques which are

usually inancial as well as non-inancial, external and future-oriented) is
signiicantly associated with differentiation strategy (0.480, p<0.01, H3a is
supported). SMA usage also has a signiicant impact on irm performance
(0.181, p<0.01, H3b is supported). These indings are consistent with past
empirical studies (Chenhall and Langield-Smith, 1998; Govindarajan and
Gupta 1985; Malina and Selto, 2001; Jermias and Gani, 2004). Since H3a
and H3b are supported, it is posited that SMA usage mediates partially the
relationship between product differentiation strategy and irm performance
(H3c is supported). However, Cadez and Guilding (2008) ind SMA usage
mediates fully the relationship between prospector strategy and irm
performance. Their study does not ind any direct link between ‘prospectors’
strategy and irm performance. Cost leadership strategy does not have a
positive relationship with the usage of SMA techniques (-0.096, P<0.05).
This is in line with the indings of Chenhall and Langield-Smith (1998)
and Cadez and Guilding (2008).
SMA has the characteristics of broad scope systems which cover information
relating to external environment, inancial as well as non-inancial and
future-oriented. Broad scope systems allow managers to make successful
economic decisions in the long run (Hoque, 2006). The inding of this study
is therefore consistent with past research that broad scope system is more
effective for irms applying strategy of continuous/market development
and innovation (Prospectors) than irms applying strategy of protecting a
78

comparatively narrow and stable product-market (Defenders) (Abernethy

and Guthrie, 1994; Hoque, 2004).
Strategic decision-making involves a high degree of uncertainty and risk;

requires wider participation and information to improve decision quality
(Louis, 2011). The changing role of accountants in strategic orientation is
associated with business strategy (differentiation and cost leadership). It is
in line with the Floyd and Wooldridge’s (1993; 1997) empirical studies that
middle level managers are usually involved in strategic activities (0.302,
p<0.01; 0.300, p<0.01, H1a is supported). In line with Cadez and Guilding
(2008), the study does not ind support that accountants’ participation in
strategic decision-making process is associated with performance (-0.234,
P<0.01, H1b and H1c are not supported). Perhaps, it is right for Chenhall
(2008) to claim that management accountants have yet to be accepted to
perform their strategic role in most organizations. Floyd and Wooldridge
(1997) ind managers with formal positions in boundary-spanning sub-units
report higher levels of strategic inluence activity than others. It is possible
that management accountants may not be in the boundary-spanning units
which usually play a key mediating role between environmental uncertainty
and internal organizational arrangement. In spite of this, strategic role
of accountants still has an indirect impact on irm performance through
the mediation of SMA usage. The accountants’ participation in strategic
decision-making process tend to make them more innovative on accounting
system design in order to provide more qualitative and future-oriented
information for decision-making (Emsley, 2005; Brouther and Roozan,
1999; Abernethy and Bouwens, 2005). The increasing role of accountants in
strategic orientation appears to support the greater usage of SMA techniques
(0.178, P<0.001, H2 is supported).
It was also pointed out that with the exception of activity-based costing
and the balanced scorecard, there is scant interest shown in research on
practice of management accounting (Baldvinsdottir, et al., 2010). Practicing
accountants may have dificulties applying these SMA techniques as some
of the techniques are in the stages of conceptual developments, e.g. attribute
costing, strategic cost analysis (Roslender and Hart, 2003). Despite the
claim by academics that standard costing and variance analysis are hiding
the ineficiency of operations, many accountants are still reluctant to move
away from traditional management accounting.
79

The study has to consider some limitations before drawing any conclusion
from the indings. Firstly, in view of the small sample size, it is unlikely
to have satisfactory proof of the association of the latent variables. The
sample is drawn from the manufacturing SBUs of listed companies in
Malaysia, an emerging market. Some caution is required in interpreting the
results. Secondly, quite a number of the 16 techniques identiied in Cadez
and Guilding (2008) are overlapping, and different education background
of accountants in the region could pose cognitive issues. Thirdly, the
study has not considered other contextual variables such as size, industry,
organizational structure, external environment and technology. Fourthly,
cross-sectional research design cannot examine claims regarding the causal
possibility. The single conceptual model assumes that all constructs are
unidimensional. Alternative models play a critical role when a particular
construct is more properly conceptualized as multidimensional (Hulland
1999). Fifthly, the study only makes use of the “pure” strategies and does
not test the effectiveness of combination (or hybrid) strategies. Sixthly,
this study’s indings are based on the respondents’ opinions on their irms’
conditions.
Finally, SMA variables based on two dimensions need further exploration

as the R2 value in respect of irm performance is rather weak. There may
be potential implications on the adoption of the type of business strategy.
Some accountants interviewed during pilot test lament that management
accountants in Malaysia are not pro-active enough to play their role in
strategic decision-making process and likewise top management has yet
to change their mindset to allow accountants becoming more strategic
in their role in formulating and implementing business strategy. This
negative perception about accountants may have adverse impact on the
association between strategic role of accountant and irm performance.
Notwithstanding the limitations of the study, the PLS results helped advance
the understanding in Strategy-SMA-Performance relationship.
Conclusion
The study aims to enhance the knowledge in SMA. Using a contingency

model, the study hypothesized that the two dimensions of SMA (strategic
role of accountant and SMA usage) individually mediate the relationship
80

between competitive strategy and irm performance. It is expected that

the irst dimension of SMA, strategic role of accountant, mediates the
relationship between differentiation strategy and cost leadership strategy and
irm performance. It is also posited that the second dimension, SMA usage,
is associated positively with differentiation strategy and irm performance.
Strategic role of accountants is also expected to have an impact on SMA
usage.
Consistent with Porter’s (1980) contention, results from PLS test conirms
that a irm can attain above-average performance if it possessed one of the
two basic competitive strategies (i.e. cost leadership or differentiation).
The path analysis shows that strategic role of accountant is positively
associated with competitive strategy (differentiation and cost leadership),
but negatively associated with irm performance. SMA usage is found to
be positively and signiicantly associated with differentiation strategy but
negatively associated with cost leadership strategy. The indings support
that strategy requires the appropriate control systems to enhance competitive
advantage, as SMA usage is positively and signiicantly associated with
irm performance.
In conclusion, this exploratory study found SMA usage mediates the

relationship between differentiation strategy and irm performance. The
strategic role of accountant appears to inluence the usage of SMA. The
indings are consistent with most of the literature. Our study demonstrates
that in the Malaysian context the management accountants have yet to
be actively involved in the strategic decision-making process and some
may have dificulties in applying these new SMA techniques. It appears
that there is a gap between theory and practice. Porter’s (1980, 1985)
product differentiation strategy which stresses on innovation, growth and
learning complements well with SMA, a broad scope and external focused
information system.
Future research may have to explore further the motivational factors of

accountants’ involvement in strategic decision-making process, and whether
adoption of combination strategies can be associated with higher usage of
SMA. Since the study is conined to manufacturing SBUs only, future
research should consider extending the study to service industry such as
banking and healthcare organizations. The interaction between resource-
81

based theory of competitive advantage and Porter’s (1980) competitive

strategy has become a resurgent interest of strategic management researchers
(Grant 1991; Spanos and Lioukas 2001; Parnell 2011). Hence, it is also
important to ascertain whether strategy formulation can be inluenced by
organizational capabilities developed under resource-based theory of the
irm. Using a longitudinal data or case studies may assist in addressing
these issues.
Appendix A. Proiles of the respondents
Size
By Employees By Annual sales (RM million)
Below 150 25 Below 25 20
150-500 35 25 to 100 36
501-1000 25 101 to 500 33
Above 1,000 18 Above 500 14
Total 103 Total 103
Export sales (%)
Below 20% 37
20% to 50% 28
More than 50% 38
Total 103
History of responding companies
Less than 5 years 3
5 to 10 years 15
More than 10 years 85
Total 103
Industry
Textiles & apparel 4
Food & beverages 14
Furniture, wood-based products 15
Electrical & electronics 13
Transport & automotive 6
Rubber-based products 4
Plastic products 7
Pharmaceutical, cosmetics 4
82

Chemicals 2
Iron, steel & other metal products 21
Other industry 13
Total 103
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Table 1: Descriptive Statistics
N Items Mean Std. Std. Actual range Theoretical

Dev. Error range
Variables Min Max Min Max
SMA usage 103 16 4.14 1.12 0.11 1.00 6.63 1.00 7.00
Differentiation 103 4 4.46 1.34 0.13 1.00 7.00 1.00 7.00

Firm
103 7 4.67 1.06 0.10 1.57 6.86 1.00 7.00
performance
Cost
103 6 4.85 1.27 0.13 1.00 7.00 1.00 7.00
leadership
Strategic role of
103 5 4.64 1.37 0.13 1.00 7.00 1.00 7.00
accountant
Table 2: Convergent Validity, R Square and AVE
AVE Composite Reli- Cronbach’s R Square

ability Alpha
Cost leadership 0.6509 0.9178 0.8924
Differentiation 0.7032 0.9044 0.8590
Firm
0.6681 0.9333 0.9170 0.1184
performance
SMA usage 0.6056 0.8842 0.8379 0.2999
Strategic role of
0.8660 0.9700 0.9611 0.2260
accountant
Table 3: Latent Variable Correlations
Strategic
Cost Differen- Firm SMA
accoun-
leadership tiation performance usage
tant
Cost
1
leadership
Differentiation 0.2468 1
Firm
0.1767 0.2188 1
performance
SMA usage 0.0888 0.5230 0.2082 1
Strategic role of
0.3748 0.3759 -0.0370 0.3226 1
accountant
Root AVE 0.8068 0.8366 0.8174 0.7782 0.9306

Table 4: Path Coeficients and t Values
Coeficient t Value
Cost leadership -> Firm performance 0.2087 3.9204
Cost leadership -> SMA usage -0.0965 2.0683
Cost leadership -> Strategic role of accountant 0.3003 4.7021
Differentiation -> Firm performance 0.1604 3.1181
Differentiation -> SMA usage 0.4797 9.5818
Differentiation -> Strategic role of accountant 0.3018 5.4258
SMA usage -> Firm performance 0.1813 3.3184
Strategic role of accountant -> Firm performance -0.2340 4.5070
Strategic role of accountant -> SMA usage 0.1784 3.8926

COmpArATIvE STudIES Of COST
ACCOuNTING prACTICES IN JApAN
ANd GErmANy
Shinsuke WADA
Osaka University of Commerce, Japan
Peter Kajüter
Matthias Moeschler
University of Münster, Germany
Abstract
This paper examines the characteristics of cost accounting in Japan and

Germany and how it is embedded in the cultural, institutional and educational
environment. The indings are based on an exploratory survey concerning
cost accounting in medium-sized Japanese and German companies in the
food and beverage, mechanical engineering as well as hospital sector.
The main purpose of this project is to investigate the similarities and the
differences of cost accounting practices in Japan and Germany. In particular,
this paper describes the close relationships of cost accounting and cultural
factors. The empirical results suggest that Japanese cost accountants are
rather integrated into the Japanese management systems. Moreover, a gap
between education and practice, and a diversity of career developments in
the ield of cost accounting are identiied.
Acknowledgements: The authors wish to thank the Melco Foundation and

the Institute of Management Accountants’ Foundation for Applied Research
for inancial support.
Introduction
Empirical studies contributed to the progress of management accounting

research. Researchers have tried to explain the reasons why cost and
management accounting practices vary according to the industry and country

in recent years [Kajüter and Moeschler (2011); Yoshida et al., (2010),

Takahashi et al., (2004), Watanabe (2000)].
The main objective of this research project is to compare cost accounting

practices in Japan and Germany. A tentative plan for a questionnaire was
suggested by the German research partners. The questionnaire was developed
irst in English and, thereafter, translated into Japanese and German.
At irst, the contents of the questionnaire included views and terminology

of German cost accounting in some parts. However, later the questionnaire,
through discussion, was carefully updated so that the contents were
modiied and related to respondents in both countries, and assured an equal
balance in the response of both countries’ participants. In its inal form, the
questionnaire was composed of four sections, Section A: general questions
about the company, Section B: objectives of cost accounting, Section C:
design of cost accounting systems, and inally Section D: performance of
cost accounting systems [Moeschler (2012), p. 368ff.].
The questionnaire was sent to Japanese and German medium-sized companies

in three unrelated industries: food and beverage, mechanical engineering
and medical hospitals. These three industries were chosen because they are
all well represented and important in both Japan and Germany. Thus, the
results of the equivalent questionnaires are suited for both cross-country
and cross-industry comparison. Medium-sized companies employing about
250 to 2,000 employees were surveyed because they were considered to be
oriented toward domestic markets. They were expected to relect a good
grasp of cultural factors involved in cost accounting practices compared to
large companies which are often more inluenced by global forces.
The addresses of companies from the food and beverage and mechanical
engineering industry in Japan come from several sources. These databases
include the Kaisha-Shikihou (listed companies) from 2010 and Mijyoujyou-
Kaisha (unlisted companies) from 2010, which are published by Toyo
Keizai Inc., Nikkei and Kaisha-Shokuinroku (listed and unlisted companies)
from 2010, which are published by Diamond Inc. and Nikkei Telecom 21.
Additionally, the addresses of hospitals were obtained from Byoin-Nenkan
(Hospital Year Book) from 2008 and 2010 by Research and Development
Co.Ltd.
96

Comparative Studies of Cost Accounting Practices in Japan and Germany
Figure 1: Summary of Data Collection in Japan and Germany
Industries Companies (Japan) Companies (Germany)

Food & Beverage 55 100
Mechanical Engineering 72 164
Medical Hospital 56 218
Sum 183 482
Figure 1 presents a breakdown of the respondents by country and industry.

As noted, the empirical data from the three industries is separated into
Japanese and German respondents. A total of 1,571 letters was sent to
Japanese companies: to the board, the head of the accounting department
or employees who are in charge of cost accounting tasks. In total, 183
Japanese companies returned the questionnaire (response rate of 11.6%).
The position of cost accountants in Japan is not regarded as ixed and

differentiated in the organization. On the contrary, the person in charge
of cost accounting is readily recognized in Germany. Due to cultural
and institutional differences, the German research partners called cost
accountants individually and asked them to participate in this study.
Consequently, 1,329 companies in total were contacted. 480 companies
returned the questionnaire, so that a response rate of 36.1% could be
achieved in Germany.
The distribution of the number of employees, a proxy for irm size, is

presented in Figure 2 for both the Japanese and German sample. Most
companies in the sample have 250 to 999 employees. The average number of
employees is 769.6 for the Japanese and 771.3 for the German sub-sample.
Figure 2: The Distribution of Employees’ Number
The Number of Employees Japan Germany

250 9% 8%
250 ― 499 39% 45%
500 ― 999 38% 30%
1,000 ― 2,000 14% 12%
2,000 5% 5%
97

Cultural Aspects About Cost Accounting
The early development of cost accounting in Japan was affected by

accounting theory and practice from both the United States and Germany.
Japanese companies had growing concerns to implement advanced
institutional and legal systems. Accounting systems from different cultural
backgrounds gradually took root, being modiied to it the Japanese cultural
and institutional context. In the following we describe the cross-cultural
factors that shaped the characteristics of cost accounting systems.
In Germany, financial accounting and management accounting have

developed in principle separately [Busse von Colbe (1996)]. From an
historical point of view, the different developments of accounting systems
had an impact on the construct of cost accounting systems [Coenenberg
et al., (1990)]. Tracing historical developments of cost and management
accounting is crucial in identifying representative principles of cost
accounting systems. Colwyn and Luther in their 2005 paper stated, “German
controlling has developed independently under much stronger inluence by
economic theory than was the case in the UK...” [Colwy and Luther (2005),
p. 168]. Thus, one reason why cost accounting practices among countries
differ is the different historical development of cost accounting systems.
In contrast with the past, many large German companies that adopted IFRS
have redesigned their traditional accounting systems in recent years. The
convergence between inancial accounting and management accounting
occurs in this process [Franz and Winkler (2006)]. The adoption of
IFRS strongly inluences internal reporting as well as external reporting,
by causing interaction between inancial accounting and management
accounting.
The impact of cultural elements on cost and management accounting has

been frequently examined [Nishimura (1995), MacArthur (2006)]. First
of all, management accounting studies from the cultural perspective have
been swayed mostly by the work of Hofstede. He indicated that culture
consists of four, later six dimensions affecting social values and behavior
in organizations (power distance, individualism-collectivism, masculinity-
femininity, and uncertainty avoidance) [Hofstede et al., (2010)]. Evidence
from his surveys showed that Japan and Germany resemble in uncertainty
98

avoidance, but apparently vary in the area of long-term orientation,

individualism and collectivism. It is quite relevant to examine just how these
cultural aspects affect the conceptual design of cost accounting systems.
Similar to Hofstede, Dore (2000) argued that there are considerable

similarities between Japan and Germany “in terms of the inancialization/
liberalization process, but with a more deeply institutionalized, uncertainty-
eliminating structures and a much more ‘productivist’ culture than either
Britain or the United States.” [Dore (2000), p. 171].
Considering cultural points of view, Nishimura (1995) consistently

concluded that “it is important to make the general characteristics of
present excellent management accounting clear and to develop an advanced
management accounting suitable for the national culture of each country”
[Nishimura (1995), p. 330].
According to his insights, because Japanese management is strongly

connected with cultural aspects like collectivism (teamwork) and
masculinity (loyalty to company), transplanting a production system or
target costing into other countries might cause some dificulties. And the
impact of Japanized company [Marinaccio and Morris (1991)] was also
investigated as an emerging topic in this line of research [Hutchinson and
Liao (2009)].
For example, another study that MacArthur (2006) presented was the
comparative analysis of management accounting in Germany and the
United States. “... Two countries, one key cultural difference is uncertainty
avoidance. Germany is classiied as a strong uncertainty avoidance (SUA)
country with a low tolerance for uncertainty, while the United States is
considered to be a weak uncertainty avoidance (WUA) nation with a high
tolerance for uncertainty ” [MacArthur (2006), p. 11)].
He invoked that cultural aspects should not be underestimated in implementing

a typical German costing procedure, Grenzplankostenrechnung (GPK), in
U.S. companies. However, GPK has received increasing interest in the U.S.
in recent years, even though the conceptual design of GPK was already
developed around the 1960’s in Germany. Due to a different cultural and
institutional environment in the USA, GPK has been adapted for U.S.
99

companies. In 2005, US researchers started this attempt by merging GPK

with ABC [Clinton and Webber (2004); Webber and Clinton (2004);
Thomson and Gurowka (2005), p. 31].
While these previous indings are insightful, there is still a need to better
understand how cultural, institutional and educational aspects are closely
interrelated in terms of cost accounting practices. This is particularly true
for Japan and Germany as both countries have a distinct tradition in cost
accounting [Moeschler (2012)].
Implications from Selected results
In this section, we review the results of cost accounting practices observed

from the exploratory ield study in Japan and Germany. The indings reveal
distinctive features of Japanese and German cost accounting.
Although there is remarkably a difference in culture between Japan and

Germany, it is necessary to carefully interpret the results of this research
to ind out how similar or different cost accounting practices in the two
countries are.
In the following, selected empirical indings are presented regarding six key
aspects of cost accounting: (1) IT systems, (2) managers’ satisfaction with
cost accounting, (3) the distribution of cost accountants’ workload, (4) the
primary source of cost accountants’ knowledge, (5) skills of cost accountants
and (6) top management support for cost accounting in both countries.
IT Systems
In this section, the main functions of IT systems are reviewed. The

effectiveness of cost accounting systems in a country can be evaluated by
the quality of physical devices and competence of users.
Given the advances of information technology and software in recent years,

the use of the ERP system for gathering all kinds of accounting information
has been widely acknowledged. Users like cost accountants are supposed to
manage accounting information systems in order to achieve their objectives
100

by producing appropriate cost information. Cost accountants engage in

coordinating the complexity of planning and analyzing alternative tools of
cost accounting. Respondents were asked to assess characteristics of their
IT systems on a seven point scale.
Figure 3: Features of IT system in companies

Do the following statements apply to your company’s IT system?
(1 = strongly disagree… 7 = strongly agree)
Japan Germany
Food & Mechanical Medical Food & Mechanical Medical
Beverage Engineering Hospital Beverage Engineering Hospital
Highly
cross-
function-
ally
integrated 3.53 4.00 3.79 4.91 5.12 5.05
Provides
user-
friendly
query
capabili-
ties 3.86 4.12 3.78 4.47 4.56 4.37
Provides
compre-
hensive
cost and
perfor-
mance
informa-
tion 3.94 4.05 2.90 4.82 4.71 4.53
Most infor-
mation is
updated in
“real-time“
and not
periodi-
cally 4.04 3.70 4.01 4.56 4.68 4.82
As shown in Figure 3, IT systems, in all three industries, are more highly

cross-functionally integrated in Germany than in Japan. Moreover, the
indings indicate that the quality of cost and performance information in
Japanese hospitals is rather low (2.9 on average). This is partly because
101

speciic issues to capture the attributes of costs and performance in medical

treatments remain unsolved.
Managers’ Satisfaction with Cost Accounting
We review the degree of managers’ satisfaction with information

provided by cost accounting systems in this section. The empirical data
implies signiicant observations concerning the quality of cost accounting
information.
Figure 4: Managers’ satisfaction with cost accounting
How satisied are the managers overall with the information
provided by your cost accounting?
(1 = not at all… 7 = very satisied)
Figure 4 shows that the degree of satisfaction of German managers is higher

than that of their Japanese counterparts. Japanese managers’ satisfaction is
very low in hospitals. In contrast, German managers in all three industries
are quite satisied with the information. Consistently, previous studies
conducted by Friedl et al., (2009) also indicated that German managers are
generally satisied with the cost accounting information in their companies.
Cost Accountants’ Workload
Cost accountants are often not only in charge of cost accounting. Moreover,
the relevance of inancial accounting and management accounting might
vary internationally. Due to a different cultural and institutional background
102

it can be expected that the division of cost accountants’ workload differs

between Japan and Germany. The division of the cost accountants’ workload
is illustrated in Figure 5.
Figure 5: The distribution of cost accountants’ workload

How is the workload divided up for persons responsible
for cost accounting?
Japanese cost accountants spend their time almost evenly among inancial
and management accounting, and other tasks. By contrast, German cost
accountants spend a lot of time performing management accounting tasks
in all three industries. The importance of management accounting might
be higher in Germany than in Japan. However, the precise tasks within
inancial accounting and management accounting have not been explored.
It therefore remains subject to future research to analyze what kind of jobs
cost accountants are actually engaged in.
The Primary Source of Cost Accountants’ Knowledge
In this section, the primary source of knowledge of cost accountants is

reviewed. Respondents were asked to assess potential sources of knowledge
on a seven point scale.
103

Figure 6: the primary source of cost accountants’

knowledge in Japan
Where did Japanese cost accountants acquire the knowledge
of cost accounting?
Figure 6 shows that Japanese cost accountants generally acquire knowledge

of cost accounting from learning by doing at work. As a result, Japanese
cost accountants in the three industries do not always take a course of cost
accounting during their studies at university, although they engage in the task
of cost accounting at their workplace. As was pointed out by Wijewardena
and Cooray (1995), in Japanese companies, the background of accounting
personnel does not necessarily correlate with their university education
[Wijewardena and Cooray (1995), p.369].
The results also show that Japanese cost accountants tend to acquire
their knowledge more often from in-house training than their German
counterparts. This may be explained by the fact that Japanese employees
work in various job positions irrelevant to whatever they have studied at
university [Shields et al., (1991)].
104

Figure 7: Source of cost accountants’ knowledge in Germany

Where did German cost accountants acquire knowledge of cost accounting?
In comparison with Japan, cost accountants in Germany acquire their

knowledge of cost accounting chiely from their studies at university. After
studying cost and management accounting at university, students are very
likely to work in the area of cost and management accounting.
It is possible that the occupational consistency of practice and education

represent a distinctive German way of thinking in society. Relating to this
issue, Ahrens and Chapman (2000) argued that the German Controllers’
occupational identity was dominated by their academic training [Ahrens
and Chapman (2000), p.495].
In their study about the functions of management accountants in Germany

and the U.K., they concluded that “the occupational identity of the British
management accountants was framed as a professional mobility project
in which the individual practitioners sought to maximize marketable
experience. The occupational identity of the German controllers was framed
as the distanced analysis of economic lows and objective moderators
between organizational units” [Ahrens and Chapman (2000), p. 496)]. Their
focus on the identity of management accountants revealed that the purpose
of German management accountants is mainly to describe economic reality.
In Germany, cost accountants produce cost accounting information making
use of their theoretical knowledge from university. This probably leads to
105

the reason why the degree of German managers’ satisfaction is so much

higher than that of their Japanese counterparts.
In summary, judging from occupational attainments of German cost

accountants, a close cooperation between university and company
regarding cost accounting creates much success. Based on the results
of the questionnaire, there seems to be a remarkable impact of cultural
and educational factors on cost accounting practices. Education of cost
accounting at university affects career development differently in Japan
and Germany.
Skills of Cost Accountants
In this section, we review cost accountants’ skills in the food and beverage,
mechanical engineering and hospital sector in both Japan and Germany.
Figure 8: Characteristics of cost accountants

in mechanical engineering
To what extent do the following characteristics apply
to your company’s cost accountants?
(1 = not at all… 7 = completely)
106

Figure 8 shows that German cost accountants are more qualiied to enhance
and run cost accounting systems than their Japanese counterparts. On
the contrary, Japanese cost accountants seem to be rather qualiied for
requirements in inancial accounting than managerial accounting.
It can be presumed that the capability of enhancing and improving

the accounting systems is related to the theoretical knowledge of cost
accounting. Thus, the nature of the Japanese cost accountants’ profession
differs from German cost accountants by their practical character.
Top Management Support
In this section, the degree of top management support is reviewed. Prior

research demonstrates that top management support is an essential
prerequisite for successfully implementing cost accounting systems like
ABC [Shields (1995), p. 161-164; Krumwiede (1998), p. 259-269]. With
top management support, suficient resources are provided and it determines
what employees accept and work with [Shields (1995), p. 150].
Figure 9: Support from top management

To what extent do the following statements apply
to your cost accounting?
Japan Germany
Mechani- Mechani-
Food & Medical Food & Medical
cal Engi- cal Engi-
Beverage Hospital Beverage Hospital
neering neering
It receives
strong,
active
support 3.6 3.9 3.26 4.57 4.62 4.41
from top
manage-
ment
Top man-
agement
provides 3.64 3.82 3.24 4.61 4.59 4.05
suficient
resources
107

The results indicate that top management in Germany gives cost accountants
moderate to high support in all three industries. The top management
support for cost accounting is higher in Germany than in Japan.
discussion
The results in previous sections have shown that there are several differences
in cost accounting practices between Japan and Germany. Taking these
matters into account, it is suggested that it requires mutual cultural
understanding in implementing best practices of cost accounting systems
from another cultural sphere.
Some themes have emerged through this research. The most provocative
indings from the Japanese perspective concern different roles of cost
accountants in both countries.
What employees recognize as social values tends to be hardly changeable,

however, there are changing circumstances taking place against the
background of the stagnation in Japan. Because of globalization and
localization, the external changing environment requires reorganizing
human resource management in Japanese organizations.
Japanese companies have more and more concerns about employing highly
educated workers. The seniority system has been gradually converted into
a more performance-based system in most Japanese companies over the last
two decades. Life time employment, a cornerstone in Japanese employment,
is no longer guaranteed in even the large companies [Moeschler (2012)].
However, according to Stiles (2009), the institutional heritage of Japan

remains a powerful force, and the Japanese focus on quality and high
commitment have spread around the world [Stiles (2009), p. 428-429],
although he observed the impact of Japanese management systems in
another Asian context.
Firstly, the skills of Japanese cost accountants due to learning by doing on the
job are characterized as company-speciic in a group-oriented environment.
A closely connected group of Japanese workers displays greater competitive
108

advantage so far. From this research, it is also recognized that career

developments of Japanese cost accountants have not shifted away from
attaching importance to job experience. One interpretation of the function
of Japanese cost accountants is that it is integrated into the Japanese
management system.
In contrast, in Germany there are cooperative relationships between education

and practice in the course of career development of cost accountants,
assuming the importance of cultural, institutional and educational aspects.
Wagenhofer (2006) argues that contributions of management accounting
research to a society in German speaking countries including Germany,
Switzerland and Austria are outstanding for three reasons: “…[B]ecause of
the prominence of normative and conceptual research and the case studies,
as well as the development of cost accounting software in close connection
with academia” [Wagenhofer (2006), p. 11].
From this standpoint, contributions of individuals to organization and

society are generally admired in terms of professionalism. The skills of
cost accountants are considered to be compatible outside their companies
in Germany. In this respect, it revealed that there is a deinite difference
regarding career paths of cost accountants between Japan and Germany.
As noted above, Hofstede classiied initially four values that distinguish

cultures in different nations. Social values are placed on professionalism
and individualism which are explicitly incorporated in the role of German
cost accountants. On the other hand, professionalism and individualism are
not considered to be so admired in Japan. Therefore, Japanese companies
offer their own path for cost accountants. In this setting, Japan and Germany
are categorized in the same dimension, in terms of uncertainty avoidance.
Although both countries are in accord with avoiding uncertainty, it doesn’t
necessarily mean that two countries react in the same way or use the same
tools in cost accounting in order to prepare for uncertainty. An application of
this reaction is observed in developing various types of cost accounting tools
such as Grenzplankostenrechnung in Germany. GPK is so sophisticated
that it can provide highly detailed cost information for different purposes
[Friedl et al., (2009)], while the construct of cost accounting tools in Japan
is regarded as rather simple.
109

Organizational values which are more or less relected by national cultural

factors are closely related to the workforce. Nishimura (2003) spoke about
Japanese management accounting and culture as follows: “In particular,
Japanese middle- and lower level managers play an important proactive
role in anticipating problems before they occur. In this Japanese system
much depends upon the mutual trust between workers and managers, proper
training, multi-skilled employees and a irm belief in the ability to amend
wrong plans if everyone works together to control the operating management
process” [Nishimura (2003), p. 59-60].
Nishimura comments focus an important aspect of the relationship of cost

accounting and culture with signiicant implications for Japanese cost
accountants. He placed a strong emphasis on the role of middle and lower
managers. It is very worthy to note that there exists a mutual trust between
workers and managers, with proper trained and multi-skilled employees in
a Japanese company.
As indicated by Wijewardena and Cooray (1995), “In-house education

and training given in many Japanese irms is characterized by a unique
system of imparting a basic knowledge of accounting to all employees in
the organization, in addition to providing the accounting staff with a much
more comprehensive and advanced programme of training” [Wijewarden/
Cooray (1995), p. 368].
The occupational features of Japanese workers in the area of staff assignment

and job rotation have emerged mainly due to this Japanese management
system and continued because of the success of the postwar economic
growth. Job rotation is aimed at increasing the capabilities of employees.
Employees share common information by experiencing various positions
in the departments.
These results lead to opportunities for deepening the mutual understanding

between Japan and Germany. In order to increase productivity in developing
human resource management in cost accounting, it is highly relevant for
Japanese cost accountants to closely connect major subjects at the university
with job contents, while maintaining the cultural identity of Japanese
management. These indings advance our understanding of how the cultural
and educational aspects shape the role of cost accountants further.
110

Conclusions
In recent years, many researchers have noted that best practices in other
countries can be applied to another country by considering cultural,
institutional and educational factors carefully.
Utilizing the empirical data from companies in Japan and Germany, we

examined the characteristics of cost accounting and cost accountants. In
this sense, the career path of cost accountants seems to be more consistent in
Germany than in Japan. Moreover, German cost accountants are motivated
to work in an organization and receive active support from top management.
Cross-cultural consideration of the selected indings showed that the role
of cost accountants is different in Japan and Germany. The main function
of Japanese cost accountants is apparently integrated into the Japanese
management systems. Japanese cost accountants are rather accepted as
generalists who have a wide knowledge acquired from job experience in
the organization. Consequently, the lack of theoretical knowledge and
insuficient training for Japanese cost accountants may make a company
lose the competitive advantage.
The indings indicate that German cost accountants make use of their
competence acquired by combining practice and education through
a coherent career development. In addition, the professionalism and
individualism are widely accepted as social values in Germany. The
standardization of skills in the ield of cost accounting is aimed at developing
their capabilities.
Finally, this study is subject to several limitations. The sample consists of

two countries, Japan and Germany, and three industries, food and beverage,
mechanical engineering and medical hospitals. Since the samples were
derived from medium-sized companies only, research in the future needs to
be extended to analyze how cultural factors are observed in large companies,
various other countries and industries. Moreover, job components of cost
accountants in organizational contexts need to be investigated. We also
hope to continue our research to explore in more detail how cultural factors
inluence management accounting. However, this exploratory study offers
important insights into comparative cost accounting.
111

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114

INTrICACIES Of OvErhEAd COST
AllOCATIONS ANd dISTOrTION
IN COSTING:
A SyNThESIS Of ThE lITErATurE
Bülend Terzioglu
School of Business
Australian Catholic University, Australia
Abstract
In the early 1920s, direct labour comprised most of the total cost of
manufacturing, and allocating overheads using direct labour hours or
direct labour cost was suficient for inventory valuation purposes, which
was then the primary object of cost accounting. However, the upsurge
of manufacturing overhead as a percentage of manufacturing cost at the
expense of direct labour and proliferation of product lines complicated the
otherwise relatively straightforward process of overhead cost allocation.
Empirical evidence demonstrates that our understanding of how best to
allocate overheads is at a nascent stage, and surprisingly most managers still
do not know their costs. Moreover, managers have grave concerns about
the current practice that allocates overheads to products in an arbitrary
fashion. These concerns stem from the fact that managerial decisions are
based on cost information furnished by management accountants, which
is ostensibly inaccurate. This conceptual discussion paper integrates the
extant accounting literature on overhead cost allocation, discusses the
ramiications of inaccurate cost allocation, and highlights areas for further
research. Consistent with many earlier studies, the indings reported in this
article show that the primacy of arbitrary cost allocations is maintained, and
that managers are unsure of the accuracy of their costs and apprehensive
about the problems emanating from inaccurate cost allocations.
Key words: Overhead, allocation, cost distortion, ABC.

Introduction
Manufacturing overhead cost is deined as the sum of direct and allocated

costs of manufacture other than direct labour and purchased materials
(Miller and Vollmann, 1985). Cost allocation refers to the assignment
of indirect costs to a particular cost object with the aim of making better
strategic decisions (e.g., pricing, product mix, customer mix), motivating
managers, providing feedback for performance evaluation, inventory and
income valuation, and inally to justify costs or obtain reimbursement
(Horngren et al., 2008). Previous studies suggest that most companies
allocate overheads in an arbitrary manner (Thomas, 1974). Fremgen (1976)
described arbitrariness in a reference to indirect overhead costs, which, in
his opinion, are neither useful nor appropriate for decision-making purposes.
Avoiding cost allocation is generally recommended in the literature except
where allocations are made for inancial and tax reporting, government
contracting and cost-plus pricing purposes (Zimmerman, 1979). Failure of
conventional cost accounting systems in meeting the needs of contemporary
organisations is well documented in the literature (Johnson & Kaplan,
1987; Shank and Govindarajan, 1988). Underlying causes responsible for
the inadequacy of conventional cost systems include that traditional cost
accounting was originally designed to value inventory, the cost structure of
many companies has changed and direct labour is no longer the dominant
cost item and driver, companies’ product lines have widened, and managers’
priorities have changed (inventory valuation is no longer the primary
objective).
Intense competitive conditions, under which most irms operate, necessitate

managers know their costs as accurately as possible so they can make
better business decisions about issues such as pricing, product proitability,
customer proitability, product mix, and resource allocation. In practice,
however, cost allocation has posed a signiicant problem for management
accountants for years. Nearly a century ago, overhead allocation was
described as the most dificult area of accounting (The Accountant, 1913).
What makes this issue problematic is the controversy about how to best
allocate overhead costs; interestingly, cost allocation is still regarded as
the prominent problem in cost accounting (Kerremans et al., 1991). While
Cooper and Slagmulder (1998) observed that many companies allocate
support costs to operating units using a ‘peanut butter’ approach that
116

Intricacies of Overhead Cost Allocations and Distortion in Costing
spreads these costs in an arbitrary fashion, Pirrong (1993) did not consider
the arbitrary allocation as a major issue, suggesting that advantages of
cost allocation still outweigh disadvantages even when allocation is
arbitrary. Similarly, it is argued that because facility-level costs (including
nonmanufacturing costs) are ixed over a wide range of activity, they are
likely to be irrelevant for product-related decisions (Drury and Tayles, 1995).
Despite the fact that overhead cost allocation has been an ongoing problem
for management accountants and the potential harmful consequences when
costs are computed inaccurately are well known, surprisingly there is very
little research on allocating overhead costs and its impact on decision-
making. This paper contributes to the literature on two levels. First, the
study described in this paper contrasts cost allocation practices across
nations and highlights the key pitfalls associated with the use of overhead
allocation. Second, it accentuates the importance of accuracy in overhead
cost allocations and enhances our understanding of the lingering problems
around cost allocations under extant literature results. Finally, the present
study provides some foundation for future researchers.
The paper continues with a summary of previous research on various

aspects of cost allocation (section two). Section three contains a discussion
of conclusions and areas for further research.
Summary of prior research
The real driving force behind manufacturing overhead is not production

volume but transactions dealing with logistics, balancing, quality and
change (Miller and Vollman, 1985). Cooper and Kaplan (1987) suggested
that many of the transactions that drive costs are largely determined by the
complexity of plants’ operations. While allocating overheads remains one
of the key headaches for management accountants, the topic has received
little empirical attention. Shields (1997) reviewed 152 articles published
by North American researchers in six leading journals between 1990 and
1997, inding that only 5.3% of articles dealt with cost allocation. Consistent
with this, Chenhall and Smith (2011) examined 231 papers published by
Australian researchers in 10 leading management accounting journals
between 1980-2009, and reported that articles on ‘costing’ represented
117

only 4.8% of the total. Finally, Scapens and Bromwich (2010) reviewed
articles published by Management Accounting Research Journal during
1990-1999 and 2000-2009, and concluded that cost accounting systems and
techniques made up 11% of all topics studied during 1990-1999, but only
4% during 2000-2009. The apparently large decline in academic interest
in cost accounting is noteworthy, because there is no evidence that cost
accounting issues have been resolved in recent years.
The Objectives of Cost Allocation
Joye and Blayney (1990) surveyed the 2096 largest manufacturing

companies in Australia and found that the majority (80%) allocated
overheads for pricing purposes, cost control (73%) and external reporting
(55%), and smaller but substantial minorities allocated overheads for product
addition/deletion decisions (24%) and performance evaluation (12%). Cost
allocations are made to encourage optimal utilisation of resources, third-
party reimbursement, motivation, decision-making (Zimmerman, 1979)
and inventory valuation (Johnson and Kaplan, 1987).
The cost allocation process typically consists of: (a) deinition of cost
objects, (b) accumulation of allocable costs, (c) determination of allocation
bases, and (d) the actual allocation to cost objects (Rossing & Rohde, 2010).
Top management allocates costs to inluence the behaviour of managers to
take action in the best interests of the company as a whole (Ramadan, 1989).
Two key outcomes that can be expected from allocating costs are better
economic decisions and a higher level of managerial motivation (Snyder
& Davenport, 1997). Using an experimental design, Wouters (1996) found
that cost allocations can serve as a reference point when decision-makers
deal with decision risk. Cost allocation is part of an organisation’s cost
management system, and has four major objectives: to predict the economic
effects of strategic and operational control decisions, to provide desired
motivation and to give feedback for performance evaluation, to compute
income and asset valuations for inancial reporting, and to justify costs or
obtain reimbursement (Horngren et al., 2008). Kerremans et al., (1991)
found that cost information was most relevant for inventory valuation,
setting prices, performance evaluation of managers, and sales strategy.
118

A questionnaire-based survey carried out by Brierley et al., (2006), revealed

that product cost information was the least important element in making
decisions on selling prices, make-or-buy, cost reduction, product design,
evaluating new production processes and product discontinuation. Brierley
et al., (2006) inding contrasts with some earlier results (Govindarajan and
Anthony, 1983; Kaplan & Atkinson, 1989; Mills, 1988). In general, cost
managers rate ‘actionable cost information’ as their top priority (Ernst and
Young, 2003). Given previous studies showed that cost-based pricing was
the most widely adopted method for setting prices (Drury and Tayles, 1995);
overhead cost allocations which contribute to total costs merit further study.
Bases of Overhead Cost Allocation
In a survey of 658 UK companies in the food sector (Abdel-Kader and

Luther, 2006), 17% of respondents considered the use of plant-wide
overhead rate to be important and 27% moderately important. Sixteen per
cent of respondents thought the use of departmental or multiple plant-wide
overhead rates was important and 35% moderately important. Direct labour
has been identiied as the most popular method for allocating overheads
(Cohen and Paquette, 1991). Drury et al., (1993) reported that only 21% of
the irms they studied had established separate support department overhead
rates; the majority reallocated support department costs to production
departments and allocated these costs to products on the same basis as other
cost centre overheads. Direct labour is the most frequently used allocation
base in the UK, USA and Australia, even though direct labour represents
10-15% of total manufacturing cost (Drury and Tayles, 1995). Surveys
in the UK, USA, and Australia have found that approximately 30% of the
respondents use plant-wide rates. Japanese companies allocate overhead
costs using direct labour cost/hours to encourage design engineers to identify
opportunities to reduce the product’s labour content and thus promote
greater use of technology (Hiromoto, 1988). In India, research conducted
by Anand et al., (2004) found that in the irst stage of cost allocation, 62% of
companies used the direct method to allocate support department overhead
costs amongst their production departments; the reciprocal method, which
is considered more theoretically sound, was not popular within corporate
India. Brierley et al., (2006) argued that the importance product cost
information in determining selling price was minimal, and the importance
of product costs in decision making was not inluenced by the method of
119

overhead cost allocation. As shown in Table 1, direct labour-based (hours

and cost) overhead allocation methods are the most common overhead
allocation bases worldwide. Drury and Tayles (1994) attribute the primacy
of direct-labour cost methods to the ready availability of details of direct
labour hours, whereas details associated with arguably more appropriate
cost drivers may entail expensive data collection costs.
Arcelus et al., (1997) noted that research focus should be shifted from
identiication of the best allocation method to the purpose of allocation.
Therefore, there is little justiication for searching for an equitable cost
allocation, especially if coordinating activities have their own priorities
that conlict with the parties’ own priorities. Abdel-Kader and Luther
(2006) surveyed the British food and drinks industry and found that use
of a plant-wide overhead rate was considered ‘important’ and ‘moderately
important’ by 44% of respondents while 23% indicated using plant-wide
overhead rate ‘very often’ and ‘often’. Fifty-one per cent regarded using
departmental or multiple overhead rates as ‘important’ and ‘moderately
important’, and only 13% indicated they use departmental or multiple rates
‘very often’ and ‘often’.
Cost Structure of Manufacturing Companies
Miller and Vollman (1985) classified overheads under four types of

transactions: logistics, balancing, quality, and change. Logistic transactions
deal with the receipt and movements of materials in a plant. Balancing
transactions are incurred to coordinate the supply of and demand for
resources in production activities. Quality transactions are performed
to ensure that goods are produced to customer requirements. Change
transactions are used to revise manufacturing systems for alterations in
product or process design. Cooper and Kaplan’s (1991) framework posits
that a company’s overhead is driven by four types of activities: unit-level,
batch-level, product-sustaining, and facility-sustaining activities. Unit-level
activities are activities to support the production of a unit of output. Batch-
level activities are activities to support the production of a batch of outputs.
Product-sustaining activities are undertaken to enable speciic products to
be produced. Krumwiede (1998) reported that many businesses allocate
overhead costs to products in proportion to volume-based measures (i.e.,
machine hours, direct labour hours). It has been long claimed that as a
120

ASIA-PACIFIC.indd 121
Table 1: Bases of Allocation of Overhead Costs to Products

Uyar Brierley Chongruksut Brierley Lamminmaki Lamminmaki Bjørnenak Clarke Drury Joye & Kato Schwar-
(2010) et al. (2002) et al. & Drury & Drury (1997) (1997) & Blayney (1986) zbach
(2006) (2001) (2001) (2001) Tayles (1990) (1985)
(1994)
#
Country Turkey UK Thailand U.K. New Zealand UK Norway Ireland U.K Austra- Japan USA
lia
Direct labour cost 19.7% 22.5% 40.8% 4.7% 37.0% 13.0% 29% 23.3% 58.0%
Direct labour hours 14.8% 46.1% 38.8% 19.2% 38.0% 25.0% 28.0% 39.0% 68%+ 54% 58.3% 35.7%
Machine hour 11.5% 39.8 16.3% 22.5% 29.0% 22.0% 49% 27% 21.5% 27.7%
Volume of production 19.7% 29.8 60.2% 19.4% 40.0% 28.0% 42% 34% 36.8% n/r
Direct costs 17.8% n/r
Direct material cost 4.9% 16.8 25.5% 8.1% 26.0% 7.0% 30% 19% 18.8%
Prime cost 65.6%
Set-up times 9.2% 5%
Production runs, # of 5%
parts
Production time 14.7% 18.5%
Selling price 1.3%
Other 0 6.3% 7.0% 23.0% 9% 7% 18.4% 20.5%
Manufacturing cost 26.0% 32.0% 31.0%
Percentage of selling 8.0% 13.0% 13.0%
price
Do not trace/allocate 20.7% 28.0% 23.0% 23.0%
non-manufacturing
costs to products
# Automated production activities + or direct labour cost n/r: Not reported
3/13/2013 4:50:27 PM
result of increased automation and advances in technology, the proportion

of direct labour has been declining as a percentage of total cost, whereas
overhead costs are on the rise (Cooper, 1988; Cornick et al., 1988; Hardy
and Hubbard, 1992). Smith (1989) estimated direct labour costs at no more
than 8-12% of all costs.
Table 2 shows that the proportion of direct labour in total manufacturing

cost ranges around 15-20%, and has hardly changed since the early 1990s.
The outlier in previous research is the CAM-I survey (1988), which found
that direct labour comprised 55% of total manufacturing cost in the UK
companies surveyed. Research data on direct material cost as a proportion
of total manufacturing cost reveal no consistent pattern, ranging between
12% and 61% in 1988 and 2003 respectively. Manufacturing overhead as
a percentage of total manufacturing cost varies between 20% and 33%,
but this variation does not signify a decline over the thirteen year review
period. The sophistication of a costing system is a function of the degree
of competition, diversity of products, number of products and proportion
of overhead costs that cannot be directly assigned to products (Drury and
Tayles, 1995).
In Hussain et al., (1998) survey of small and medium-sized Finnish

businesses, 37% of respondents reported no problems in allocating costs to
products and 38% indicated that the cost allocation basis was not reasonable.
Kerremans et al., (1991) found that the proportion of direct labour costs
in automated companies was signiicantly lower than in companies with
mechanical production, and that overhead costs were not signiicantly higher
in automated companies. Witherite and Kim (2006) argued that owing to the
proportionately larger overhead costs of service industries, ABC was their
logical choice for cost allocation. In the late 1980s, Kaplan (1988) pointed
out that although direct labour makes up less than 5% of total manufacturing
cost, many companies use direct labour costs to allocate overheads.
Distorted Cost Information
As Worthy (1987) pointed out accurate product costing is critical for

product pricing, product introduction and product emphasis especially where
multiple products are involved. Most companies allocate overhead costs
back to user departments as a percentage of direct labour dollars, headcount
122

Table 2: Cost Composition of Manufacturing Companies

(As a Percentage of Production Costs)
Country Usable Direct Direct Total Other Manu-
re- labour material direct costs facturing
sponse costs overhead
Al-Omiri & Drury UK 91 14% 52% 75% 10%
(2007)
Brierley et al., (2006) UK 280 11% 51% 15%
Hughes & Gjerde USA 130 18% 53% 72% 28%
(2003)
Ernst & Young (2003) USA 2,000 22% 23% 45% 21% # 34-42%
Chan & Lee (2003) Hong 41 n/r n/r 59% 41%*
Kong
Chongruksut (2002) Thailand 89 18.4% 27.6% 14.0% 18.9%
Lamminmaki & Drury New 85 19% 60% 79% 21%
(2001) Zealand
Lamminmaki & Drury UK 303 16% 61% 77% 23%
(2001)
Chen et al., (2001) Hong 90 36.3%
Kong
Nguyen & Brooks Australia 120 21.8% 46.7% 31.5%
(1997)
Lukka & Granlund Finland 135 19% 45% 64% 36%
(1996)
Drury & Tayles (1994) UK 303 12% n/r n/r n/r
Drury et al., (1993) UK 75% 25%
Green & Amenkhienan 11% 75% 25%
(1992)
Kerremans et al., Belgium 90 21% 55% 76% 5% 20%
(1991)
Joye and Blayney Australia 430 17% 60% 23%
(1990)
Inoue (1988) Japan 14% 62% 76% 24%
CAM-I (1988) UK 55% 12% 67% 33%
Schwartzbach (1985) USA 15% 53% 68% 32%
Miller & Vollmann USA n/r 35%
(1985)
# Automated production activities + or direct labour cost n/r: Not reported
or company sales, and as a result most user departments pay the same amount
regardless of how much they use the service (Davis, 1991). Haphazard
cost allocation gives rise to distorted cost information (Thomas, 1980). At
123

the root of the cost distortion problem lies the fact that conventional cost
systems are not in fact designed to measure costs accurately but have been
developed to value inventory; therefore, cost distortion in organisations
that use conventional cost accounting is inevitable (Johnson, 1983; Kaplan
1988). Empirical evidence (Thomas, 1980; Ernst and Young, 2003) suggests
that conventional cost systems generate distorted cost information, based on
which pricing, proitability, product mix, performance evaluation and other
decisions are made. Drury and Tayles (1994) described traditional costing
systems as simplistic and falling short of meeting the needs of contemporary
organisations. This begs the question of whether all traditional costing
systems cause cost distortions. Alnestig and Segerstedt (1996) remarked that
Swedish manufacturers often employ a ‘proportionality approach’ which
is in some ways similar to activity-based costing in that it allocates costs
so that in the short and long terms they change proportionately with the
cost centres to the cost objects. They suggested that the advanced computer
systems for materials and production control should be developed to produce
appropriate cost allocation data. In their survey of 2000 members of the
Institute of Management Accounting in the USA, Garg et al., (2003) found
that 98% of respondents reported that some factors cause distortions in cost
information and 38% indicated that those distortions were signiicant. The
most frequently reported factors that cause distortion in costs were overhead
allocations (30%), shared services (20%), and greater product diversity
(19%). Overhead allocation topped the list because operating and selling,
general and administrative overheads accounted for 34-42% of operating
costs across all industries (Garg et al., 2003). Kerremans et al., (1991)
found that although many irms concur that cost information is important
for inventory valuation, price setting, performance evaluation of managers,
sales strategy and so on, only about one-third of irms reconsider the eficacy
of cost calculations regularly, and another third do so occasionally. Studies
to date lend support to Cooper’s (1989) contention that the lack of precise
product overhead costs lies at the heart of distorted product costs and prices.
Merchant and Shields (1993) argued that some companies deliberately

use less accurate systems to overstate costs to prevent price shaving
by marketing personnel, while others deliberately understate costs to
encourage improvement and innovation in production methods or to
stimulate consumption of such services as computing and research and
development (R and D). Changes in the competitive landscape and
increased global competition necessitate accurate product costing (Cooper,
124

1988), but achieving accurate product costs is dificult (Lamminmaki and

Drury, 2001). The CAM-I survey in the UK (1988) and Kerremans et al.,
(1991) demonstrated that most companies are doubtful whether suitable
allocation bases are used, and consequently have concerns about cost
allocation. Conversely, however, Fremgen (1976) suggested that as a
general rule, allocations of indirect costs are neither useful nor appropriate
for management accounting purpose. Cost control, for example, is not
facilitated by allocations of indirect costs, and hence indirect cost allocations
are generally not useful for decision-making. Although management
accountants’ primary function is to provide timely and accurate information
to management, Ernst and Young’s (2003) survey revealed that almost all
respondents (98%) concurred that overhead allocation begets distortion
in costs. The increase in the proportion of overheads propels the level
of distortion in costs for which the use of simplistic overhead allocation
bases is responsible (Drury & Tayles, 1995). Provision of inaccurate cost
allocation distorts product costing, which in turn leads to incorrect product
pricing and destructive impact on competitiveness and income. Brierley et
al., (2001) found that product cost information is most important for setting
the selling price.
Consequences of distorted costs

Volume-based costing can seriously distort the way a irm looks at its
strategic options and the way it assesses the proit impact of its pricing
and product emphasis decisions. Transaction-based cost data can help to
clarify the cost dimension of such decisions (Shank and Govindarajan,
1988). Shank and Govindarajan (1988) pointed to the likelihood that
manufacturers will over-emphasise less proitable product lines because
distorted cost information can mislead managers about the proitability of
different products (Horngren et al., 2008).
Proponents of distorted cost information

Kaplan and Atkinson (1989) suggested that accuracy of product costs should
be dependent upon the purpose for which the cost information is required.
Hiromoto (1988) recounted his experience at a Hitachi plant in Japan
that allocated manufacturing overhead based on direct labour; although
managers did not seem to be bothered about whether the use of a direct
labour base would lead to bad decisions, they believed using direct labour
as a basis would motivate their managers to reduce direct labour content. In
other words, the allocation base was determined by the long-term strategy
125

of improving the competitiveness of the irm by reducing direct labour.

Wagenhofer (1996) showed that a cost accounting system that reports
systematically distorted product costs can be preferable to an accurate
system. The cost accounting system does not serve to become informed
about costs but to motivate a proit centre manager to make decisions more
in line with what the principal desires.
It is almost always optimal for the principal to forego accuracy in order to

improve incentives for a manager, even if this comes at the cost of inducing
ineficient pricing decisions. Research by Stratton et al., (2009) used data
gathered from 348 US companies, of which 54% were service companies,
and found that most respondents believed their system was unable to
accurately trace activity costs to inal objects and could not accurately
trace overhead costs to inal cost objects. However, in the case of ABC
users, almost 58% of respondents agreed that their system accurately
traced overhead costs to inal cost objects and 35% per cent disagreed. This
inding indicates that ABC made some inroads in resolving the overhead
allocation problem. Cooper and Slagmulder (1998) suggested treatment
of corporate support costs as discretionary expenses and measurement of
outputs from staff departments and quantiication of the used corporate
services by operating units. Their argument is that the inaccuracy and lack
of transparency in cost allocations can be best resolved using activity-based
costing.
Avoidance of Cost Allocation
Once a company separates its system for measuring operating performance

from that used to value inventory, it does not have to allocate common or
noncontrollable costs to individual cost centres. By avoiding allocations, the
operating report can be based on accurate, objective data on the cost centre’s
consumption of resources during a period (Kaplan, 1988). Drury and Tayles
(1994) found that 23% of respondents did not allocate non-manufacturing
costs to products, presumably relying on an increased mark-up to cover
non-manufacturing costs. Lamminmaki and Drury (2001) showed that
28% of the sampled New Zealand irms and 23% of manufacturing irms
did not attempt to allocate manufacturing costs to products
126

Overhead Allocation in Service Firms
Service irms differ signiicantly from manufacturing irms in that they

are labour intensive rather than capital intensive. Most of the labour cost
can be traced directly to the irm’s output of services with the rest of the
cost is usually charged to a single overhead cost pool and then allocated to
speciic engagements, usually as a percentage of direct labour cost. This
charge for overhead will distort the total cost of the engagement if different
types of jobs cause costs to be incurred that are not in proportion to the
number of hours worked or the direct labour cost incurred (Pirrong, 1993).
The overhead costs often constitute a substantial part of the total costs in
service irms and it is essential to derive them to the activities causing the
costs when producing a service (Hussain and Gunasekaran, 2001). Service
organisations do not use cost driver techniques in their cost measurement
and allocation procedures. A service irm can collect costs by various
functions and allocate them based on cost drivers that cause the costs to
vary (Pirrong, 1993). In management accounting, the question of cost
allocation is a contentious issue. Overhead is becoming an increasingly
large component of product costs, and therefore may cause distortion in
traditional volume-based costing methods. In fact, Ernst & Young (2003)
demonstrated that operating and sales, general and administrative overheads
constitute 34-42% of operating costs across all industries which is quite
similar to Al-Omiri and Drury’s (2007) inding of 32% indirect costs for
service irms. Dificulties in overhead allocation include the diversity of
services which make them hard to deine and dificult for cost analysis
(Mills and Cave, 1990). It was Drucker (1963), who reported for the irst
time, that it is the number of transactions rather than the number of units
that drives overhead costs. Davis (1991) claimed that most companies
allocate overhead costs back to user departments on a formula basis, such
as headcount, percentage of direct labour dollars, or percentage of company
sales. As a result, most user divisions or departments pay the same amount
regardless of how much they use the service. Corporate support costs are
allocated to the operating units using a ‘peanut butter’ approach that spreads
these costs in arbitrary ways (Cooper and Slagmulder, 1998). The outcome
of such a simpliied approach is both low accuracy and zero transparency.
Transparency ensures both sides to a transaction understand the source of
allocated overhead costs, and accuracy ensures that costs are identiied and
transferred properly.
127

Transfer Price and Cost Allocation
Ackoff (1993) argued that allocated costs can amount to 40% of total unit
costs. While some costs are too dificult to identify, they represent the cost
of activities, which have impact on competitive advantage (Johnson and
Kaplan, 1987). Davis (1991) claimed that most companies allocate overhead
costs to user departments using a formula based on headcount, percentage
of direct labour dollars or percentage of company sales. Ramadan (1989)
found that top management’s motive in cost allocations was primarily to
inluence the behavior of managers in a desired manner. Choudhury (1990)
discussed the implications of overhead cost allocation from a fairness
perspective and pointed out to the need for more research on this overlooked
dimension of cost allocation.
Is activity based costing an answer to cost allocation problems?
One of the claimed advantages of ABC over traditional cost accounting

is its ability to allocate overhead costs more accurately. While Bjørneak
(1997) and Booth and Giacobbe (1997) found a positive association between
the level of overhead costs as a percentage of total costs and the extent of
ABC adoption, Nguyen and Brooks (1997) and Khalid (2005) found no
such relationship. This is a rather surprising inding which indicates that
volume of overheads is not the major driver for ABC adoption, which it
was intended to achieve. Without denying some companies accounts that
they beneited from calculating ABC product costs and thus improved
their operations, Johnson (1992) questioned the usefulness of ABC in the
long term suggesting that ABC is fundamentally a short-term cost cutting
tool which may weaken a company’s competitiveness in the long run.
ABD adoption rates reported in some selected studies (Table 3) shows the
sluggish progress in ABC adoption across various countries. Furthermore,
indings do not show any clear trend either. Although there are beneits that
can accrue from adopting ABC, one of the key pitfalls to avoid is ABC
can also lead to cost distortions where the underlying assumptions of ABC
have been violated (Latshaw and Cortese-Danile, 2002). Concerns over the
eficacy of ABC in accurately attributing overheads to products are voiced
by some authors (Noreen, 1991; Innes et al., 2000; Jones and Dugdale,
2002; Armstrong, 2002). It is argued that irms which are using ABC can
better control and manage overhead costs (Stapleton et al., 2004). In its
128

initial years of introduction, activity-based costing (ABC) was described

by Johnson (1990) as one of the most important management accounting
innovations of the twentieth century. While much has been written on ABC,
the results dealing with success of ABC appears to have fallen short of
expectations. Evidence pertaining to ABC success in resolving the overhead
cost allocation problem is also patchy and inconclusive.
Table 3: Extent of ABC Adoption

Country Sample Industry ABC
adoption rate
Al-Omiri and Drury (2007) UK 900 Manufacturing & 29%
service with a
turnover >£50m
Maelah and Ibrahim (2007) Malaysia 1257 Manufacturing 36%
Kiani and Sangeladji (2003) USA Largest 500 Industrial 52%
corporations
Krumwiede and Leikam (2002) USA 44 Non-manufacturing 25%
irms
Innes et al. (2000) UK Times1000 Manufacturing 19.8%
Chenhall and Langield-Smith Australia 140 Manufacturing irms 56%
(1998)
Bjørnenak (1997) Norway 132 largest Manufacturing 40%
Booth and Giabobbe (1997) Australia 213 Manufacturing 12%
Conclusions and implications for future research

This paper has discussed issues confronted by irms in allocating overhead
costs. It is generally conceded that cost allocations are still largely arbitrary,
and management accountants are not conident that the cost information
provided to decision-makers is accurate. The fact that most irms set their
external prices using cost-based methods (in most cases based on full costs)
casts doubt on the precision of external prices. Lack of precision in pricing
impinges on the irm’s revenue, bottom line and competitive position in
the marketplace.
The data reported here suggest that simplistic cost allocation methods prevail
among irms, and give no indication that irms plan to tackle the problem.
Given the paucity of research into cost allocations, more exploratory
research is needed to gain better insight into the problem. Brierley et al.,
(2001) highlighted two topics ripe for research: how product costs are
129

calculated and used in decision making, and the way in which overheads
are treated in each industry. Research results to date regarding how cost
allocation information is used in various managerial decisions are patchy
and confusing. Particularly for Australia, knowledge about the proportion
of manufacturing overhead in total manufacturing cost is out of date. In
addition, there is a need for further research into the treatment of overheads
in service industries, which constitute a growing percentage of the gross
domestic product of industrialised countries. Despite strong criticisms,
reasons behind the continued use of direct labour as a basis for overhead
cost allocations should be studied using either in-depth interviews or a
case study approach. The literature indicates that the objectives sought for
cost allocations need to be explored. Although the introduction of activity-
based costing was intended to bring an end to cost allocation problems, its
adoption rate [around 15%, according to Innes et al., (2000) and Drury &
Tayles (2000)] has remained far below early expectations.
Ideally, future research should also include behavioural implications of cost

allocation on divisional manager’s performance and motivation. Another
fertile area for further research is the examination of the ramiications of
distorted cost information on managerial decision-making. Finally, there
is a need for a speciic investigation of the role of ABC in resolving the
cost allocation problem.
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139

AN ExpErImENTAl INvESTIGATION ON
ThE EffECT Of fEEdBACK CONTrOl
pOlICy ANd NEEd fOr AChIEvEmENT
ON SuBOrdINATES’ BudGETAry
SlACK CrEATION
Vincent K. Chong
Irdam Ferdiansah
University of Western Australia
Abstract
This paper examines the effects of one management control mechanism -

namely, feedback control policy - on subordinates’ budgetary slack creation.
This paper also investigates the interaction effect of feedback control policy
and the personality trait of ‘need for achievement’ on budgetary slack.
A laboratory experiment was conducted and a 2x2 analysis of variance
(ANOVA) was used to test the hypotheses formulated for this study. The
independent variables were the feedback control policy and the personality
trait of ‘need for achievement’. The dependent variable was budgetary
slack. The results indicate that the presence of a feedback control policy
reduces the budgetary slack created by managers under private information
conditions. The results further reveal that managers with a high need for
achievement create less budgetary slack than those with a low need for
achievement, when feedback control policy exists.
Keywords: Feedback Control Policy, Need for Achievement, Budgetary

Slack Creation.
Acknowledgements: We gratefully acknowledge the helpful comments and

suggestions from David Woodliff. This project was funded by a research
grant at the UWA Business School, The University of Western Australia.

Introduction
Budgets are an integral part of the management control systems for most
organisations. Generally, organisations use budgets to motivate employees,
allocate resources and evaluate performance (Walker and Johnson, 1999).
Organisations motivate employees by promising a reward when they meet
or exceed the budget. As a result, employees will try to negotiate a budget
target to a level where it is easier to be achieved (Cyert and March, 1963;
Onsi, 1973; Merchant 1985, 1989). Onsi (1973) stated in his research that
80 per cent of managers that he interviewed bargained for slack as a result
of pressure from top management to meet the budget. A slack budget can be
used as a buffer for uncertainty; however, it has negative implications for the
company, such as causing managers to invest low effort, the misallocation
of company resources and biased managers’ performance evaluations (Lowe
and Shaw, 1968; Dunk and Nouri, 1998).
Issues related to budgetary slack are some of the most researched topics
in management accounting (e.g. Onsi, 1973; Merchant 1985; Young,
1985; Dunk, 1993; Stevens 2002; Webb, 2002; Hartmann and Maas,
2010). Budgetary slack is deined as a manager’s action whereby he or she
misrepresents his or her budget in order to have more scarce resources,
or to have an easier budget to attain (Onsi, 1973; Young, 1985; Kren,
1993). Numerous studies have examined the determinants and the control
mechanisms that can prevent or minimise budgetary slack behaviour (Onsi,
1973; Merchant, 1985; Young, 1985; Waller, 1988; Dunk, 1993; Kren, 1993;
Fisher et al., 2002a, 2002b; Stevens, 2002; Webb, 2002; Maiga, 2005).
Most of these studies have relied on agency theory to explain budgetary
slack behaviour.
The agency theory posits that the principal and agent are bound by a
contract in which the principal delegates some of his or her authority to
the agent (Baiman, 1982, 1990). The agency theory assumes that agents’
actions are driven solely by their self-interest. Problems occur when the
organisation’s (the principal) interest does not match the agent’s personal
interest (Baiman, 1982, 1990). As a result of this conlict, the agents may
shift their action from company interest to personal interest, thus causing
losses to the company.
142

An Experimental Investigation on the Effect of Feedback Control Policy
Prior studies that relied on agency theory (Merchant, 1985; Young, 1985;
Chow et al., 1988; Fisher et al., 2002a, 2002b) found that there are two
circumstances in participative budgeting in which agents are likely to
sacriice the organisation’s interests for self-interest (thus creating budgetary
slack). The irst circumstance occurs when the principal emphasises the
budget as a performance evaluation and a basis for managers’ rewards
and compensations (see e.g. Merchant 1985, Chow et al., 1988; Fisher et
al., 2002a, 2002b). When budgets are used as a performance evaluation
and a basis for managers’ rewards, managers may submit budgets below
their performance capabilities, hence creating slack in order to have a
good performance evaluation and maximise their rewards. The second
circumstance occurs when managers possess private information about
their performance capabilities (Young, 1985; Chow et al., 1988; Fisher
et al., 2002a, 2002b). When managers possess private information about
their performance capabilities, they have the chance to accommodate their
personal interest (for example, gaining maximum compensation) because
their superiors do not have information about their performance capabilities,
and cannot determine whether or not the budget contains slack. Empirical
evidence supports the notion that privately held information creates an ideal
condition for agents to engage in opportunistic behaviour (Young, 1985;
Chow et al., 1988; Fisher et al., 2002a, 2002b).
To date, prior literature has focused on explaining the determinants of

budgetary slack (e.g. Onsi, 1973; Merchant, 1985; Young 1985; Waller,
1988; Chow et al., 1988; Fisher, 2002a, 2002b; Maiga, 2005). Other studies
have sought to examine the formal and informal budgetary controls that can
be used to mitigate this slack behaviour (see e.g., Chong and Ferdiansah,
2011; Kren, 1993; Stevens, 2002; Webb, 2002).1 This paper aims to
contribute to the current knowledge of the control mechanisms of budgetary
slack behaviour by examining one form of budgetary control - namely,
feedback control policy. This paper argues that feedback control policy acts
as an effective formal control focused on reducing budgetary slack in an
information asymmetry situation. Furthermore, this paper examines how
1
Formal control refers to a mechanism that is structurally established by the organization
as a part of organization procedures which aim to deter and detect any dysfunctional
behaviors. Informal control refers to a control mechanism that is established through
organization culture and environment which eventually affects the behavior of members
of the organization to work towards organization’s goals.
143

the interaction between feedback control policy and the personality trait of
‘need for achievement’ affects budgetary slack.
This paper proposes that the use of a feedback control policy as a formal
budgetary control will reduce subordinates’ budgetary slack behaviour.2
By establishing a feedback control policy, it is expected that superiors
will be able to acquire knowledge about subordinates’ performance
capabilities, and hence reduce information asymmetry between them and
their subordinates. As a result of having information about subordinates’
performance capabilities, superiors will have the ability to detect slack in
the budget. Feedback control policy is also expected to exert pressure on
subordinates, as a result of them being held responsible for the outcome.
Being held responsible is expected to make subordinates cautious in setting
their budget, as they will have to justify any deviations in production from
the budget. When subordinates are held accountable, they are unlikely to
engage in dysfunctional behaviour (such as creating slack) due to fear of
being perceived as incompetent or a shirker. Therefore, it is expected that,
when the feedback control policy is present, subordinates will not create
slack in their budget in a private information situation.
Furthermore, this paper proposes that feedback control policy will interact
with the personality variable of ‘need for achievement’ to affect budgetary
slack. An individual with a high need for achievement can be described
as a person who emphasises the accomplishment of his or her goals with
a certain standard level of excellence (McClelland et al., 1953). Agency
theory predicts that individuals with a high need for achievement will be
more motivated to obtain the maximum reward. Therefore, they will be
more likely to misrepresent their budget in order to maximise this reward.
Therefore, this study expects that the interaction of these two variables will
affect budgetary slack.
The remainder of this paper is organised as follows. In the next section,

the theoretical model underlying the study is developed. The subsequent
sections present the research method employed, the results and the
conclusion of the study.
2
Feedback control policy is operationalized as subordinates’ obligation to provide their
superiors with quarterly report of current production activity in detail including any
deviation of the actual production from the budgeted amount.
144

hypothesis development
Information Availability and Budgetary Slack
Agency theory suggests that agents’ actions are driven solely by their
self-interest (Baiman, 1982, 1990). When there is a conlict between the
agents’ goals and the principals’ goals, the agents are likely to engage
in dysfunctional behaviours known as ‘adverse selection’ and ‘moral
hazard’ (Arrow, 1985; Baiman, 1982, 1990). Adverse selection is a pre-
contractual problem in which agents possess private information about their
job capabilities and hide this from their future employers. This condition
creates an opportunity for agents to misrepresent their job capabilities in
order to gain a more highly paid position. The moral hazard problem is a
post-contractual problem in which agents possess private information about
their actions, which is not known by their current employers. The focus of
this paper is the moral hazard problem.
Prior studies suggest that the availability of information regarding

subordinates’ performance capabilities inluences subordinates’ decisions
to create slack in their budget (Young, 1985; Chow et al., 1988; Fisher
et al., 2002a). When subordinates’ performance capabilities are publicly
available, they are less likely to create slack in their budget. The rationale
for such behaviour is that when subordinates’ performance capabilities are
publicly available, they do not possess local (private) information that can be
used to cheat by intentionally creating budgetary slack. Such dysfunctional
behaviour can easily be detected by the superior. Therefore, it is in the best
interests of subordinates not to bias their budget by creating slack.
Private information has an opposite effect on subordinates’ behaviour than

publicly available information. When information regarding subordinates’
performance is possessed only by the subordinates, dysfunctional behaviour
(such as creating budgetary slack) is more likely to occur (Young, 1985;
Chow et al., 1988; Fisher et al., 2002a). In private information conditions,
superiors do not have information about subordinates’ performance
capabilities and, therefore, cannot fully monitor subordinates’ behaviour. As
a result, there is a greater chance for subordinates to engage in opportunistic
behaviour, such as creating budgetary slack (Young, 1985; Chow et al.,
1988; Fisher et al., 2002a).
145

Feedback Control Policy and Budgetary Slack
Prior literature shows that feedback plays a motivational role, as well as

an informational or cognitive role (See Cook, 1967; Erez, 1977; Becker,
1978; Matsui et al., 1983; Hirst and Lowy, 1990; Chong and Chong, 2002).
Feedback provides an opportunity for subordinates to acquire knowledge
about their performance capabilities, which motivates them to exert more
effort to perform better. Furthermore, feedback enables subordinates to
gather more job-relevant information to improve their decision quality.
However, these studies do not investigate the possibility of feedback to be
used as a control mechanism against subordinates’ dysfunctional behaviour
in an organisation.
When subordinates’ behaviour to create slack is intensiied as a result of

having private information, a feedback control policy can be established
to reduce the effect of private information on budgetary slack creation
behaviour. Feedback control policy in this paper is operationalised as
subordinates’ obligation to provide their superiors with quarterly reports
about their production activity, detailing any deviation in production from
the budgeted amount. This policy allows superior to have an insight into
the current production performance of their subordinates, and to deter any
manipulative activities in the production. Hence, the feedback control policy
in this setting creates an opportunity for superiors to acquire information
regarding subordinates’ performance capabilities, which subsequently
reduces the information asymmetry condition between superiors and
subordinates. This provides superiors with the ability to detect any slack
created by their subordinates. It has been suggested that the ability to detect
slack can deter subordinates’ budgetary slack behaviour (e.g. Onsi, 1973;
Merchant, 1985; Young, 1985; Lal, Dunk and Smith, 1996).
Furthermore, feedback control policies encompass the notion of responsibility

and justiication for budget-setting decisions. It is expected that, when an
individual is required to assume responsibility for and be prepared to justify
his or her budget-setting decisions, he or she will experience increased
pressure. Pressure that requires an individual to be accountable for his or
her decisions is a consequence of having to provide feedback.
146

Subordinates will experience feedback pressure when they are obligated

to provide quarterly reports about their production activity, including any
deviation of actual production from the budget. Thus, when subordinates
are held responsible for the outcome of current production, they have
to explain any deviation in the actual production from the budget. It is
expected that subordinates will experience feedback pressure when setting
their budget knowing that they have to submit a report that will reveal
their current production outcome. Consequently, it is expected that they
will not set their budget target below their performance capabilities (by
creating budgetary slack). Taken together, feedback control policy can be
used as an effective control tool to mitigate the creation of budgetary slack
because it enables the superior to obtain information about subordinates’
performance capabilities, and exert feedback pressure on subordinates. The
formal hypothesis is stated as follows:
H1: Subordinates will create less budgetary slack when feedback control
policy is present than when it is absent under information asymmetry
conditions.
Feedback Control Policy and Need for Achievement
‘Need for achievement’ is a personality trait in which individuals emphasise

the accomplishment of goals with a certain standard of excellence
(McClelland et al., 1953). Research in psychology has shown that need
for achievement affects individual performance (Steers, 1975a, 1975b;
Matsui et al., 1982), individual goals (Steers, 1975a; Matsui et al., 1982) and
individual job satisfaction (Steers, 1975b). It is suggested that individuals
with a high need for achievement tend to exert more effort to achieve their
goals (McClelland et al., 1953; Atkinson, 1958). Agency theory predicts
that individuals with a high need for achievement may place more emphasis
on achieving their personal goals than those individuals with a low need
for achievement. When a budget-based compensation scheme is used, it is
reasonable to expect that agents with a high need for achievement would
do anything necessary to gain maximum reward.
As noted earlier (in H1), it has been suggested that feedback control policy
would be an effective formal control for subordinates’ budgetary slack
behaviour under private information conditions. It is expected that feedback
147

control policy will lessen the information asymmetry effect by allowing

superior knowledge of subordinates’ performance capabilities, which
will reduce subordinates’ opportunity to create budgetary slack. It is also
expected that a feedback control policy will deter subordinates’ engagement
in opportunistic behaviour, such as creating budgetary slack. Therefore,
this paper predicts that feedback control policy affects subordinates’ extent
of budgetary slack creation, subject to their personality trait of ‘need for
achievement’.
The reason for this expectation is that individuals’ behaviour is not only
determined by external factors (such as rules and social norms), but is also
affected by personality traits. Erez (1977, p.625) suggested that ‘behaviour
is a function of the interaction between the individual and the environment’.
Feedback control policy can be attributed as an environmental variable
because it is a condition established by the company. The personality
trait of ‘need for achievement’ can be attributed as an individual factor.
The following sections discuss the interaction between feedback control
policy and the personality trait of ‘need for achievement’ on subordinates’
budgetary slack.
Low Need for Achievement and Feedback Control Policy
An individual with a low need for achievement is described as a person who

does not place much emphasis on achieving goals to a standard of excellence
(McClelleand et al., 1953). It is suggested that individuals with a low need
for achievement are less motivated and subsequently likely to exert less
effort to achieve a goal to a standard of excellence (Steers and Spencer,
1977). In the agency context, individuals with a low need for achievement
would not be motivated to maximise their rewards. Therefore, agents with
a low need for achievement are unlikely to create slack in their budget.
The establishment of a feedback control policy is expected to deter the

creation of budgetary slack. Therefore, when a feedback control policy
exists, subordinates should feel some hesitation towards creating budgetary
slack. This is a result of feedback pressure exerted from the existence of
such a policy, and the fear of being detected by their superior. However,
as noted earlier, subordinates with a low need for achievement have less
tendency to create budgetary slack. Thus, it is expected that feedback
148

control policy will not affect the decisions of individuals with a low need
for achievement, in regard to creating slack.
High Need for Achievement and Feedback Control Policy
An individual with a high need for achievement refers to a person who

emphasises the accomplishment of his or her goals with a certain level
of excellence (McClelland et al., 1953). Individuals with a high need for
achievement are usually motivated to exert more effort in order to obtain
their goals with excellence. In the agency context, individuals with a high
need for achievement are assumed to be motivated to achieve their reward.
They can use their private information about their performance capability in
order to obtain higher rewards. Thus, when a budget is used as the basis for
a compensation scheme, it is reasonable to assume that agents with a high
need for achievement may misrepresent their budget by creating budgetary
slack to obtain maximum reward.
Thus, this paper predicts that subordinates with a high need for achievement
will be more inclined to engage in opportunistic behaviour in order to
maximise their reward under private information conditions and with the
absence of a feedback control policy. This is possible because the superior
does not know subordinates’ performance capabilities, and there is no
control mechanism to obtain such information in order for superiors to detect
slack in the budget. On the other hand, when a feedback control policy is
present, subordinates with a high need for achievement are limited in their
ability to create budgetary slack. The reason for this is that subordinates’
performance capabilities are provided to their superior through quarterly
feedback reports about production outcome, which increases the likelihood
of their behaviour being detected. Furthermore, subordinates with a high
need for achievement will feel feedback pressure as a result of being
responsible for the outcomes. Being held responsible means that they
need to explain and justify any deviation of production from the budget.
Therefore, it is expected that subordinates with a high need for achievement
will create less budgetary slack when feedback control policy is present
under information asymmetry conditions. Stated formally, the following
hypothesis is to be tested:
149

H2: Subordinates with a high need for achievement will create less budgetary
slack when feedback control policy is present than when it is absent under
information asymmetry conditions.
research method
Subjects
The study subjects consisted of 58 undergraduate students enrolled in

a Bachelor of Commerce at a large Australian university. The use of
accounting students as surrogates for managers in behavioural accounting
studies has been justiied, particularly when the observed tasks in the study
involve human information processing and decision-making (see Ashton
and Kramer, 1980; Clinton, 1999). These students were considered to
have suficient background knowledge to play roles as managers in terms
of processing information and making decisions for the purposes of this
study. Four subjects failed to complete the decision tasks correctly and were
excluded from the sample, which resulted in 54 usable subjects for the data
analysis. The subjects consisted of 25 males and 29 females. The average
age of these subjects was 21 years old. From 54 usable participants, 43 had
working experience, in which 26 per cent (11 students) had accounting-
related work experience, while 74 per cent (32 students) had worked in
non-accounting jobs. Upon completion of the study, subjects were paid
$15.00 (Australian Dollars) in cash as compensation for their time and effort.
Experimental Procedures
Subjects were randomly assigned to one of the two experimental treatment

conditions. The two experimental treatment conditions were based on the
manipulation of an independent variable - namely, feedback control policy
(present or absent) under private information conditions. Subjects were
asked to assume the role of division production managers at a hypothetical
company, called Company X. They were told that one of their major
responsibilities was to prepare annual division budgets, and that they were
under the supervision of a senior production manager (see Appendix 1 for
details of the case materials employed in this study). The experimental
procedures consisted of the following.
150

Session One: Task Overview, Training and Trial
The objective of Session One was to establish the performance capabilities of

the subjects. Each subject was given a booklet that contained a description
of the decision task. An illustrative example was given to the subjects to
familiarise them with the decoding task adapted from Chow (1983), which
has been used widely in accounting studies (Fatseas and Hirst, 1992; Drake,
Wong and Salter, 2007; Chong and Ferdiansah, 2011). All subjects were
asked to conduct a decoding task, which involved transforming a series
of letters into numbers, then adding the numbers. The decoding task was
a representation of subject production activity. All subjects completed
a training session to ensure that they understood the task. The subjects
were then instructed to perform a ive-minute trial session. They received
feedback on their trial session and were awarded points for each code they
correctly decoded. The performance feedback provided the subjects with
knowledge regarding how well they performed in the decoding task in
terms of how many reward points they earned. The subjects were then asked
to state their best estimate of the number of reward points they expected
to achieve in the forthcoming work session - a task that was similar in
complexity to the trial session.
Session Two: The Budget-Setting Process
In Session Two, an employee’s pay scheme was explained to the subjects.

The employee’s pay scheme formula was as follows:3
Employee’s pay scheme = $5 if A ≤ B

= $5 + [$2(A-B)] if A > B
Where: A = Actual performance

B = Budgeted amount
3
The incentive scheme was a ‘make-believe’ scheme since it was not used as a real payment
to the subjects. However, the subjects were told that the result of the pay scheme will be
used to rank the subjects and the 6 highest scores will receive an extra bonus ($15, $10,
$5; two person for each irst, second and third rank) in addition from $15 payment. This
was meant to give incentive to the subjects to exert more effort in doing the decoding task.
151

The subjects obtained a ixed payment of ive dollars when their actual
performance was less or equal to the budget amount they submitted.
However, when subjects’ actual performance exceeded their budget, they
received an extra two dollars for each unit of production (that is, reward
points) above the budget. Research has shown that this incentive scheme
is a slack inducing pay scheme (Young, 1985; Chow et al., 1988; Waller,
1988; Webb, 2002). The subjects were then given an exercise to compute
their payment according to the pay scheme formula to see whether they
understand the incentive scheme.
After the explanation of the incentive pay scheme, the subjects were asked
to make a decision regarding how much budget they would submit to their
superior. In determining the budget, they needed to consider the incentive
pay scheme and the likelihood of the company establishing a feedback
control policy.
To capture the notion of the presence of feedback control policy, subjects

in the ‘feedback control policy’ condition were advised that a professional
consultant irm, hired by Company X, had given its recommendation for
the company to establish a budget feedback control policy. The policy
required each production manager to provide quarterly feedback to their
senior manager regarding their ongoing budget performance. The aims of
the policy were:
1. to give management an insight into current production performance;
2. to deter any irregular or manipulative activities in the production;
3. to analyse the ongoing production and make any necessary adjustments

to the budget.
The subjects were further informed that Company X has endorsed this
recommendation. As a result, all subjects had a responsibility to provide
to their senior manager quarterly reports that detailed production activities,
including the deviation of actual production from the budgeted amount. On
the other hand, the subjects under the ‘no feedback control policy’ condition
were given information that, despite the acknowledgment of the objective
of feedback control policy, Company X did not have a feedback control
policy established under its current management.
152

In both treatment conditions (‘feedback control policy’ and ‘no feedback

control policy’) subjects were informed that their performance capabilities
were not available to their superior. In other words, the subjects possessed
private information about their performance capabilities. After the subjects
had set their budget, they were asked to answer one manipulation check
question. The manipulation question asked subjects to assess whether a
feedback control policy was established or not.
In the last session, all subjects were asked to complete a ive-minute session
of a decoding task. At the end of the experiment, subjects were asked to ill
a post-experimental questionnaires, which included a measurement scale
of ‘need for achievement’ and demographic data.
The measurement scale of need for achievement was tested for validity and
reliability. The Cronbach alpha coeficient (Cronbach, 1951) was 0.699,
which indicated a moderate internal reliability for the scale (Nunnally, 1967).
A factor analysis (principal components analysis) with varimax rotation was
conducted. The results of the factor analysis are shown in Table 1.
Table 1
Factor analysis of need for achievement
Item Question Factor
No. Loading
3 I take moderate risks and stick my neck out to get ahead at work. 0.811
2 I try very hard to improve on my past performance at work. 0.692
1 I do my best work when my job assignments are fairly dificult. 0.688
5 I try to perform better than my co-workers. 0.596
4 I try to avoid any added responsibilities on my job. 0.593
Eigenvalue = 2.318; Total variance explained = 46.4%; KMO = 0.753
4
Need for achievement is a ive items, 5-point Likert-type scale questionnaire asked as
a post experimental questionnaire at the end of the experiment. The subject was divided
based on average score to classify them into high or low need for achievement.
153

results
A 2x2 between-subject analysis of variance (ANOVA) was used to test the

hypotheses. The dependent variable was ‘budget slack’. Budget slack was
measured in this study as the variance between subjects’ best estimates and
their submitted budgets (Young, 1985; Webb, 2002; Stevens, 2002). The
independent variables were ‘feedback control policy’ (absent or present)
and ‘need for achievement’ (high or low).4
H1 predicts that subordinates will create less slack in their budget in the
presence of feedback control policy under information asymmetry. The
results in Table 2, panel A, show that the main effect of feedback control
policy on budgetary slack was statistically signiicant (F1,50 = 3.238, p <
0.039, one-tailed), which supports H1. Further analysis, as shown in Table 2,
panel B, shows that slack created by subordinates in the ‘no feedback control
policy’ condition was greater than slack created by subordinates under the
‘feedback control policy’ condition (122.115 v. 83.928). An independent
t-test was conducted to see whether the two means were statistically
different. The results showed that the two means were signiicantly different
(t-value 2.030, p < 0.048), which provides additional support for H1. These
results suggest that a feedback control policy can be used as an effective
formal control to reduce budgetary slack behaviour.
H2 predicts that subjects with a high need for achievement will create less
budgetary slack when feedback control policy is present under information
asymmetry. The results presented in Table 2, panel A, suggest that there
is a marginally signiicant two-way interaction (F1, 50 = 2.463, p < 0.062,
one-tailed) between feedback control policy and need for achievement.
This result provides initial support for H2.
A further analysis of the mean of slack created by subordinates showed that

subordinates with a high need for achievement created more slack when
there was no feedback control policy established (139.063), compared
to slack created by subordinates with a high need for achievement under
the presence of feedback control policy (75.000) (see Table 2, panel C).
Furthermore, a t-test showed that the difference between those two means
(64.063) was statistically signiicant (t-value = 2.182, p < 0.038). This
result suggests that, when a feedback control policy exists, subordinates
154

Table 2: Results for hypotheses 1 and 2

Panel A: Analysis of variance (ANOVA) Results
p-value
Sum of Mean
Source df F-value (one-
squares Square
tailed)
Feedback Control 15190.351 1 15190.351 3.238 0.039
Policy (FCP) 2622.783 1 2622.783 0.559 0.229
Need for Achieve- 11554.371 1 0.062
ment (NFA) 234554.688 50
11554.371 2.463
FCP x NFA 4691.094
Error
Panel B: Mean and standard deviation for budgetary slack created by

subordinates and independent t-test
Feedback Control Policy N Means Std. Deviation

Absent 26 122.115 79.789
Present 28 83.928 57.419
Total 54
Independent t-test
t-value p-value (Two-tailed) Mean Difference
2.030 0.048 38.187
Panel C: Mean and standard deviation for budgetary slack created

by high need for achievement subordinates across feedback condition
and independent t-test
Feedback Control Policy N Means Std. Deviation

Absent 16 139.063 92.181
Present 12 75.000 48.850
Total 28
Independent t-test
t-value P-value (2-tailed) Mean Difference
2.182 0.038 64.063
155

with a high need for achievement are more likely to create less slack than
when a feedback control policy is absent. Taken together, these results
provide support for H2.
Conclusions
The results of this study have a number of contributions. First, the results
of this study reveal that a feedback control policy is an effective control
mechanism to deter subordinates from creating budgetary slack. The
possible explanation for this is that a feedback control policy exerts feedback
pressure to subordinates, which deters them from creating budgetary slack.
Another explanation is that a feedback control policy enables superiors
to gain information about subordinates’ performance capabilities, which
enables them to detect slack created by subordinates. When such policy
is designed to enforce subordinates to provide quarterly reports detailing
current production activities, including any deviation from the budget,
a feedback control policy achieves its objectives of exerting feedback
pressure to subordinates. This enables superiors to obtain information about
subordinates’ performance capabilities.
Second, the results of this study provide insight regarding how environmental
variables (such as a feedback control policy) interact with personality
variables (such as a need for achievement) to affect subordinates’ budgetary
slack behaviour. This study found that subordinates with a high need for
achievement reduce the slack in their budget when a feedback control policy
is established. Third, the results of this study further reveal that a company
can establish a feedback control policy to mitigate the problems (such as
budgetary slack) that arise from information asymmetry conditions. It is
concluded that a feedback control policy can be used as an effective formal
control to reduce budgetary slack under information asymmetry.
This study had a number of limitations. First, this study used experimental
design to examine the effects of a feedback control policy and trust in
superiors on subordinates’ creation of budgetary slack. Therefore, the case
materials were meant to be a surrogate of real-world situations. However,
the case materials in this study relected a simpliied budget-setting process
that may not have captured all the variables in the real business environment.
Second, while the use of experimental design increased the likelihood of high
156

internal validity by enabling decision-making behaviour to be studied in a

controlled environment, generalising the results of this study into different
situations should be undertaken cautiously (Swieringa and Weick, 1982).5
In addition, the relatively small sample and use of student participants
may also weaken the external validity of the indings. Notwithstanding
the aforementioned limitations, the results of this study have enhanced
understanding of the methods that can be used to control budgetary slack.
While this study uses individual-level analysis, it would be useful to
examine the effects of feedback control policy in a group setting. It has
been suggested that the decisions made in groups are more extreme than
the decisions made by individuals (Rutledge and Harrell, 1994). Another
opportunity for future research would be to examine the effects of ethical
decision-making on budgetary slack. It has been found that ethical concerns
affect subordinates’ tendency to create budgetary slack (Webb, 2002).
Furthermore, it would be useful to examine ethical decision-making at the
organisational level. It has been suggested that ethical decision-making
not only comes from the individual level, but is inluenced by the culture
of the organisation (McCuddy et al., 1993; Chen et al., 1997). Therefore,
it is expected that ethical decision-making in an organisational culture
could be used as an informal control to prevent subordinates’ propensity
to create budgetary slack.
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161

AppENdIx 1
Task Overview
You are a production manager (employee) at Company X. One of your major

responsibilities is to prepare budgets. Reward points relect an employee’s
performance capability under normal eficient operating condition and are
used as the basis to set budget target. Thus, high reward points relect high
employees’ performance capabilities.
You are asked to decode a series of letters and transformed them into
corresponding numbers based on a decoding key. When all letters are
decoded into their proper numbers, you are required to add all the numbers.
For each correct answer, you will be awarded reward points.
Training Session
Key to Codes Beginning with the Key to Codes Beginning with the
Letter “A” Letter “Z”
Letter Number Letter Number
A 46 A 5461
B 12 B 6125
C 31 C 8312
D 98 D 3985
E 24 E 8245
F 87 F 6878
G 96 G 1962
H 25 H 9252
I 87 I 4875
J 96 J 2966
K 25 K 2250
L 21 L 2211
M 69 M 8690
N 57 N 5575
O 98 O 9986
P 58 P 8584
Q 36 Q 6367
R 45 R 5458
S 36 S 4369
162

T 34 T 2342
U 11 U 4113
V 89 V 4894
W 86 W 9865
X 32 X 1326
Y 95 Y 1952
Z 53 Z 3539
Training Session
Each correct answer to the codes beginning with the letter “A” is awarded
25 reward points and each correct answer to the codes beginning with the
letter “Z” is awarded 50 reward points.
Summary Total FOR OFFICE USE

1. A--LNVS
L = 21 203 25
N = 57 Reward points
V = 89
S = 36
Sum = 203
2. Z—QIUAS
Q = 6367 25185 50
I = 4875 Reward points
U = 4113
A = 5461
S = 4369
Sum = 25185
3. A--BEST
B = 12 106 25
E = 24 Reward points
S = 36
T = 34
Sum = 106
163

4. Z—GREAT
G = 1962 23468 50
R= 5458 Reward points
E = 8245
A = 5461
T = 2342
Sum = 25185
Training Session - An Exercise

5. A—SAME
6. A—SOUR
7. Z—SMALL
164

8. Z—XYRAB
Sample Only
Trail Run Session
Decoding Tasks: 5 Minutes

1. A—LAZY
2. Z—SALES
3. A—BALL
165

4. A—ZEAL
5. A—ODDS
Trial Run Session
YOUR Trial Run Session Performance
Letter “A” Letter “Z” Total
Number of Reward Points

awarded:
Your Best Estimate
You have now completed the training session. A summary of the total
number of Reward Points awarded to you is shown above. This information
indicates your performance capability in performing the above task.
Please estimate the number of Reward Points you expect to achieve in

doing a similar task in the forthcoming Work Session.
166

My estimate is: Reward points
Employee’s Pay Scheme
Employee’s pay scheme consists of a ixed and a variable component.
The ixed component of $5 will be paid if the actual reward points (A) is
less than or equal to the budget reward points (B) set.
The variable component depends upon performing at a level of reward

points (A) above the budget level (B). They will be paid $2 per unit for
reward points above B.
Hence employees are paid according to the following formula:
Employee’s Pay Scheme = $5 if A ≤ B

= $5 + [$2(A – B)] if A > B
Where A = Actual reward points; B = Budgeted reward points
To ensure you understand the employee’s pay scheme, please complete

the following questions:
If Budget (B) is set at 6:
What is the remuneration of employee for the following values of Actual

good output (A)?
B=6 Employee’s Pay Scheme
A= 6
A= 9
167

If Budget (B) is set at 8:
What is the remuneration of employee and supervisor for the following

values of Actual good output (A)?
B=8 Employee’s Pay Scheme
A=9
A=12
Feedback Control Policy Present

Feedback Control Policy
General information:
You are a division production manager for Company X in Perth. One of
your responsibilities is to submit a budget about your production to your
senior manager (your supervisor) of production.
Last year, a professional consultant irm, hired by Company X, had given

its recommendation to establish a budget feedback control policy. Company
X has endorsed this recommendation. The policy requires each production
managers to give feedback quarterly to their senior manager about the
ongoing budget performance.
The aims of the policy are:
1. to give management an insight about the current production

performance
2. to deter any irregular and manipulative activities in the production.
3. to analyze the ongoing production and make any necessary adjustment

to the budget
As a result, you are responsible to provide quarterly report to your senior

manager detailing production activities including the deviation of actual
production from the budgeted amount
168

Information Availability between Your Supervisor and You
Your superior will not receive your performance information. Therefore, it

is unlikely that your superior will learn about your performance capability.
State Your (Individual) Budget Target
My (Individual) Budget Target is: Reward points

No Feedback Control Policy
Feedback Control Policy
General Information:
You are a division production manager for company X in Perth. One of
your responsibilities is to submit a budget about your production to your
senior manager (your supervisor) of production.
Management accounting practices acknowledge that a budget feedback

control policy has the following objectives:
1. to provide management an insight about the current production

performance.
2. to deter any irregular and manipulative activities.
3. to allow management to revise or make any necessary adjustments to

their budget plan.
Company X, however, does not have a feedback control policy under the
current management.
Information Availability between Your Supervisor and You.
Your superior will not receive your performance information. Therefore, it

is unlikely that your superior will learn about your performance capability.
State Your (Individual) Budget Target
169

My (Individual) Budget Target is: Reward points
Manipulation-Check Question
Instruction: Please respond to the following questions:
Please tick (√) which of the following two descriptions best indicates the
circumstances related to Company X.
[ ] A budget feedback control policy has established.
[ ] There is no budget feedback control policy under current management.
Need For Achievement Questionnaire
Please circle the number which you feel most accurately describes your own
behaviour when you are at work with respect to the following statements.
Never Always
1. I do my best work when my job 1 2 3 4 5 6 7

assignments are fairly dificult.
2. I try very hard to improve on my 1 2 3 4 5 6 7

past performance at work.
3. I take moderate risks and stick my 1 2 3 4 5 6 7

neck out to get ahead at work.
4. I try to avoid any added responsibilities 1 2 3 4 5 6 7

on my job.
5. I try to perform better than my co-workers 1 2 3 4 5 6 7
170

171


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ASIA-PACIFIC

ASIA-PACIFIC.indd 1 3/13/2013 4:50:20 PM

1 An Exploratory Study of Balanced Scorecard Practices: Preliminary

29 Balanced Scorecard Implementation within a Malaysian Government-

59 Business Strategy, Strategic Role of Accountant, Strategic

95 Comparative Studies of Cost Accounting Practices in Japan and

115 Intricacies of Overhead Cost Allocations and Distortion in Costing:

141 An Experimental Investigation on the Effect of Feedback Control

ASIA-PACIFIC.indd 2 3/13/2013 4:50:21 PM

This paper develops a framework for Balanced Scorecard (BSC) stage

Nowadays, business environments have become increasingly competitive

ASIA-PACIFIC.indd 1 3/13/2013 4:50:21 PM

accounting department and management accountants to provide such

Balanced Scorecard (BSC) devised by Kaplan and Norton in 1992 is one of

As Kaplan (2010: 25) clearly stated that “Many academics, consultants,

Several studies use “Adoption” and “Implementation” interchangeably

ASIA-PACIFIC.indd 2 3/13/2013 4:50:21 PM

As BSC incorporates four BSC attributes (i.e., Translating strategy into

Overall, this raises the necessity of accurate determination of BSC

To date, little research has been published on strategic performance

Therefore, the objectives of this study are to develop a framework of BSC

ASIA-PACIFIC.indd 3 3/13/2013 4:50:21 PM

This paper contributes to the body of knowledge in the area of BSC by

This section briely discusses the conceptual foundation of Balanced

The Balanced Scorecard and its Attributes

The aforementioned deinition of BSC highlights four BSC attributes: (1)

ASIA-PACIFIC.indd 4 3/13/2013 4:50:21 PM

Attribute 1: Translating Strategy into Operation Terms (Strategy)

This is a very crucial feature of BSC since it is a foundation of BSC and

(1) Multiple perspectives: Grouping the measures into multiple dimensions

(2) Measures derived from strategy: Measures should be linked to the

(3) Cause-and-effect relationships (or Causal links): The linkages among

Attribute 2: Aligning the Organizational Units to the Strategy

As an organization consists of various business units and support

ASIA-PACIFIC.indd 5 3/13/2013 4:50:21 PM

strategies to the corporate-level strategy in order to generate the corporate

Attribute 3: Communicating Strategy to Employees

Attribute 4: Providing Feedback and Learning (Feedback)

Organizations should link strategy to the budgeting process by setting

ASIA-PACIFIC.indd 6 3/13/2013 4:50:21 PM

The Stages of BSC Application

Relying on irm’s response about BSC application

ASIA-PACIFIC.indd 7 3/13/2013 4:50:21 PM

Table 1: Ittner et al., (2003) Classiication Framework

BSC Stages Classiication

Firms are classiied as Non-BSC irms if the irms’ respondents identify

ASIA-PACIFIC.indd 8 3/13/2013 4:50:21 PM

Table 2: Speckbacher et al., (2003) Classiication Framework

BSC Stages Classiication Criteria

Type 2 Type 1 with the following

Type 3 Type 2 with some or all of

(4) Contain action plans/

(5) Link Measures to

Responding irms were classiied as Non-BSC irms if they specify that

ASIA-PACIFIC.indd 9 3/13/2013 4:50:21 PM

Regarding conceptual foundation of BSC and the stages of application

At this point, it is crucial to call attention to the important concern – different

As aforementioned, dissimilar interpretations (or misunderstanding) of

ASIA-PACIFIC.indd 10 3/13/2013 4:50:21 PM

In order to mitigate the misunderstanding of BSC concept, the researchers

Relying on irm’s responses about the characteristics

Speciically, responding business units were initially classiied as BSC users

ASIA-PACIFIC.indd 11 3/13/2013 4:50:21 PM