NEW ROLES FOR MANAGEMENT ACCOUNTANTS

Executive Summary
 Advances in the past ten years have made it possible for management
accountants to become part of their organization's value-added team.
 Management accountants must participate in the formulation and
implementation of strategy, then help translate strategic intent and capabilities
into operational and managerial measures.
 Management accountants have to move away from being scorekeepers of the
past and to become the designers of the organization's critical management
information systems.
 Existing performance measurement systems, even systems based on ABM,
focus on improving existing processes. The balanced scorecard, by contrast,
focuses on what new processes are needed to achieve breakthrough
performance objectives for customers and shareholders.
Changes triggered by a new competitive environment have created enormous new
opportunities for management accountants. The new competitive environment
demands much more accurate cost and performance information on the organization's
activities, processes, products, services, and customers. The cost information is
needed to do the following:
• Design products and services that meet customers' expectations and can also be
produced and delivered at a profit;
• Signal where either continuous or discontinuous (reengineering) improvements in
quality, efficiency, and speed are needed;
• Guide product mix decisions;
• Choose among alternative suppliers;
• Negotiate about price, product features, quality, delivery, and service with
customers; and
• Structure efficient and effective distribution and service processes to targeted market
and customer segments.
In the new competitive environment, operators and managers must also have timely
and accurate information to guide their learning and improvement activities--
information that will help make processes more efficient and more customer-focused.
Ideas for continuous improvement (to reduce and eventually eliminate defects and
waste, to improve quality, and to shorten cycle and throughput times) best come from
operators--the people who are closest to the work being performed and who see, first-
hand, the types of defects that occur and the principal causes of these defects.
Companies now encourage their employees to solve problems and to devise new
approaches for how to perform work and satisfy customers.
To implement such improvements, local operators cannot be held strictly accountable
to predetermined standards. They need freedom to experiment with solutions to fix
the root causes of defects. They also need information--first to identify the sources
and likely causes of defects and, second, to see immediately the consequences of
attempts to fix the causes of the defects. In this total quality philosophy, operators are
problem solvers. They are part of the process that helps to find solutions for

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eliminating defective output, waste, and activities that do not add value to customers.
For this task, information is needed to inform their problem-solving activities, not to
control them against preset and soon-to-become-obsolete standards. The new
environment stresses cross-functional linkages to promote effective and efficient
performance of business processes, not the individual tasks within a process.
Traditional cost-controlling systems, however, emphasize stability, control, and
efficiency of isolated machines, workers, and departments through the use of such
tools as standards and variance reporting. Management accountants act as
scorekeepers--neutral observers on the sidelines who are distant from the action.
Often they do not even observe the production and delivery of products and services.
Instead, they issue periodic reports--days or weeks delayed--about the scores of
"games" played in the past in production and service departments.
The new management accounting
I have been fortunate to have observed and participated in three aspects of the new
value-adding role for management accounting information:
1. Operational control systems;
2. Activity-based cost management; and
3. The balanced scorecard.
These three areas by no means exhaust all the interesting and innovative work
currently occurring within the management accounting and control field, but my
forecast is that management accountants in the year 2000 will be actively involved in
implementing, maintaining, and improving all three of these systems.
Operational control systems
Several advocates of the new total quality management (TQM) approach have
claimed that financial control systems should be discarded--that financial information
is at best irrelevant and at worst dysfunctional to the continuous improvement
philosophy underlying TQM.
One case easily disproved this assertion by documenting the innovation of a
departmental manager who had created a daily income statement for his
employees.[1] Initially, I was highly skeptical that such a statement could be useful
for improving quality and yields. After all, we had criticized managers for ignoring
long-term consequences of quality improvement because of their short-term focus on
quarterly income statements, much less daily ones.
But I soon learned that the daily income statement was indeed being used by the
operators to guide problem solving and continuous improvement activities on a day-
to-day basis. This was initially surprising, because the operators were already
receiving thousands of observations about the physical parameters of the process
under their control, including quality and yields. Yet the daily financial summary did
the following:
• Provided invaluable feedback on operators' quality improvement efforts;
• Helped them set priorities for investment and improvement activities; and
• Helped them evaluate the tradeoffs among quality, cost, and throughput.
Most important, the daily income statement empowered operators for on-the-spot
decision making. Here was a vivid counter example to the erroneous claim that
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financial information is irrelevant in a TQM and continuous improvement
environment.
More recently, a newly refurbished Ford engine plant installed a completely new
information system, one that provided daily information to each employee on quality,
process times, and financial spending.[2] Employees had the primary responsibility to
improve processes. The information provided to them on process quality, time, and
cost was intended to help them in their tasks, not to control them. In addition, Robin
Cooper's work on kaizen (i.e., continuous improvement) costing and micro-profit
centers in Japanese companies has documented how decentralized financial
information motivates continuous improvements in process efficiencies and
quality.[3]
We are still at a relatively early stage in understanding the design principles of these
new systems that provide feedback for learning and improvement activities. But the
lessons indicate that both physical information (about throughput, yield, quality and
cycle times) and financial information (about the costs of inputs consumed, imputed
prices on output produced, and also accurate spending and expense data) will be vital
information in support of employees' learning and improvement activities.
While management accountants may not have primary responsibility for providing
the physical information, only they can provide the relevant, accurate, and timely
financial information to employees. This financial information, however, is unlikely
to be the standard costs and variances from the organization's traditional accounting
system. The new financial and cost information must be derived from intimate
knowledge of the underlying technologies, capabilities, markets, and strategy of the
organization.
Activity-based cost management
Activity-based cost (ABC) systems were developed to provide more accurate cost
information about business activities and processes, and of the products, services, and
customers served by these processes. ABC systems focus on organizational activities
as the key element for analyzing cost behavior in organizations. Management
accountants have stopped worrying about how to allocate costs (the traditional
domain of cost accounting) for financial reporting purposes. They now link
organization spending on resources to the activities and business processes performed
by these resources.
Activity cost drivers collected from diverse corporate information systems (e.g.,
production and inventory control, purchasing, engineering, order entry, and sales
management) can then trace activity costs to the products, services, and customers
that create the demand for (or are benefiting from) the organizational activities. These
procedures produce good estimates of the quantities and the unit costs of the activities
and resources deployed for the individual products, services, and customers.
Two critical innovations in ABC theory over the past ten years enabled ABC
information to be integrated with value-enhancing and profit-improving activities.
The ABC cost taxonomy (i.e., unit-, batch-, product- and customer-sustaining, and
facility-sustaining activities)[4] made it possible to map all organizational expenses to
a particular hierarchical or organizational level where cause and effect could be
established. This ABC cost hierarchy provides a powerful connection to contemporary
developments in operations management. Managers can now see the tangible
financial benefits from focused factories[5] in which the production of high-volume

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products (i.e., many unit-level activities but relatively few batch- and product-
sustaining activities) are separated from the production of low-volume, customized
products (i.e., relatively few unit-level activities, but many batch- and product-
sustaining activities). The high-volume products can be produced in facilities
optimized to perform unit-level activities efficiently (but which may be
extraordinarily inefficient for performing batch- and product-sustaining activities).
Low-volume, high-variety products, by contrast, are produced in facilities that are
highly efficient for batch- and product-sustaining activities (e.g., a job shop with
skilled operators and general-purpose equipment) but that may be quite inefficient for
unit-level activities because their unit labor and machine times are much higher than
for specialized, highly automated production equipment.
Beyond focused factories, however, the need for separate facilities for high-volume
and custom production can be mitigated by exploiting the capabilities of flexible
manufacturing systems (FMS). FMS and other information-intense production
technologies (e.g., computer-aided design and computer-aided engineering) greatly
reduce the cost of performing batch- and product-sustaining activities (e.g., changing
over production from one product to another, scheduling production runs, inspecting
products, moving materials, and designing products) while retaining the efficiencies
of high-speed automated production. An ABC analysis helps to provide the business
case for investing in these advanced (and expensive) information-intense
manufacturing technologies by measuring the costs currently incurred for performing
batch- and product-sustaining activities using conventional manufacturing technology.
These costs can then be targets for elimination with the new investment in computer-
integrated manufacturing technology.
The ABC cost hierarchy also connects to the continuous improvement and lean
production activities that have swept across Western manufacturing thinking from
innovative Japanese companies. Some people like to refer to the managerial decisions
based on ABC information as activity-based management, or ABM. Managerial
actions based on ABC information includes decisions to:
• Modify pricing, product mix, and customer mix;
• Change supplier and customer relationships; and
• Improve the design of products and services.
Such decisions reduce the quantity of activities the organization is asked to perform.
ABM also includes actions that affect the efficiency of performing activities and,
potentially, eliminating the need to perform activities that do not create any customer
value. For example, companies can reengineer and improve their business processes,
and invest in new technologies that reduce the cost of performing critical activities.
Lean production
Based on the lean production paradigm, many companies are currently deploying
significant resources to:
• Reduce setup times;
• Improve plant layout based on efficient material flows;
• Reduce the resources required for quality inspection;
• Work closer with fewer, more reliable, and higher-quality suppliers that can deliver
small lots of components and materials directly to production processes, just-in-time

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for production;
• Employ electronic data interchange with suppliers and customers;
• Rationalize product mix to eliminate product models and variants that offer little
incremental value to customers;
• Design products with fewer and more common components;
• Design products and services so that customization can be based on standard
components and modules, and as late in the production process as possible.
All these ideas depart from the mass-production wisdom of emphasizing cheap
sources of materials supply, and direct labor and machine efficiencies. We can now
see that traditional standard costing systems encouraged managers and engineers to
adopt practices that reduced their unit-level costs of materials, labor and machine
time. This behavior, however, produced enormous escalation in batch- and product-
level expenses. The so-called "revolution" in the 1980s for continuous improvement
and lean production to eliminate waste and "non-value-added" activities can be
interpreted simply as the long-overdue discovery of the high cost and inefficiency of
the resources deployed by organizations to perform batch- and product-sustaining
activities. Thus, the ABC systems, especially with their explicit recognition of
expensive batch- and product-sustaining activities, provide the cost input and
benefits-tracking capability to organizations' continuous and discontinuous
improvement activities.[6]
Measuring the costs of resource usage: the role of unused capacity
The second conceptual advance for ABC systems was the explication of how costs
would change with respect to a particular decision (e.g., to add or drop a product, to
make a process more efficient, or to eliminate "non-value-added" activity). Activity-
based systems measure the costs of using resources, not the cost of supplying
resources. The two quite different cost concepts are linked via the simple and
fundamental equation:
Cost of Resources
= Cost of Used Resources + Cost of Unused Capacity
Supplied
Traditional financial systems measure the left-hand side of this equation--i.e., the
amount of organizational expenses incurred to make resources available for
productive use. ABC systems measure the first term on the right-hand side of the
equation--i.e., the cost of resources used (or, alternatively, the resource costs of
activities performed) for individual products, services, and customers. The difference
between the resources supplied and the resources actually used during a period
represents the unused capacity of the resource for the period.[7]
With this formulation, we now could see how virtually all costs can become variable
via a two-step procedure. First, demands for the resource change--they can increase
because of increased volume of activity or, for batch-and product-sustaining
resources, because of an increase in variety and complexity. When the capacity of
existing resources is exceeded, the pain is obvious through shortages, the increased
pace of activity, delays, or poor-quality work. Companies facing such pain find it easy
to relieve the pain by spending more to increase the supply of resources and relieve
the bottleneck.
In the downward direction, should the demands for batch- and product-sustaining

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resources decrease--e.g., because of improved process efficiencies and the elimination
of some "non-value-added" work, or because of conscious decisions to reduce product
and customer variety, impose minimum order sizes, and reduce the number of
suppliers--little immediate reduction in spending will be noticed. The reduced demand
for organizational resources will lower the cost of resources used (by products,
services, and customers), but the cost of unused capacity will increase to offset the
lower resource usage cost. To enjoy the benefits of the reduced demands for
resources, organizations must manage the unused capacity of these resources out of
the system. At that point--and only at that point--will the costs of resources supplied
start to decrease. Thus, what makes a resource cost "variable" in a downward
direction is not inherent in the nature of the resource. Rather, it is a function of
management decisions--first, to reduce the demands for the resource and, second, to
lower the spending on the resource. (Incidentally, managers do not seem to have any
problem recognizing how costs are "variable" in an upward direction; historical data
will usually reveal how organizational spending has increased to cope with increased
variety and complexity of operations. It's the mechanism for costs to head in a
downward direction that seems to have eluded most managers and academics.)
Extending ABC
More recently, innovating companies have been extending their ABC information out
of operations and into their customer and supplier relationships. This information
enables these companies to completely restructure their relationships with these
external constituencies. Especially powerful benefits occur when the process-oriented
ABC cost information is combined with detailed information on customer preferences
and customer value-propositions. This enables a company to segment its market by
offering a variety of operations, distribution, and marketing and sales capabilities to
provide, at minimum cost, the value proposition desired by different customer and
market segments. Thus, customers in one segment may be offered a low-cost, highly
dependable supply of standard products or services, while customers in other
segments are offered specialized products and services with desired technical,
marketing, and distribution support arrangements. ABC information guides the
company so that it makes money in both its low-cost and differentiated segments.
Finally, innovating companies will use ABC systems not just to measure past cost,
profitability, and efficiencies, but also to integrate ABC into their budgeting systems.
In this way, authorized spending on resources will be derived from the underlying
demand for (and the efficiency of) activities performed for products, services, and
customers. By linking ABC to budgeting processes, all spending becomes variable
with decisions made about processes, products, and customers. Managerial
accountants will enable their companies to look to the future, not just measure the
past.
In the past ten years, the technical theory underlying ABC has been established and
ABC applications have extended throughout internal and external value chains in both
manufacturing and service companies. Numerous success stories have been recorded,
but resistance to action remains. Managers may concur with criticisms of their
traditional cost and profit-measuring systems, yet they resist adopting or acting upon
new approaches. They frequently react defensively when confronted with an ABC
analysis.
The activation of defensive routines, at any level, indicates that the information and
the proposed changes in management decisions and actions have triggered

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embarrassment or pose a threat. Information from an ABC analysis can be highly
embarrassing or threatening to certain participants by revealing that past and
continuing organizational decisions and practices have led to undesirable outcomes,
such as unprofitable products and customers, inefficient processes, and excess
capacity. Extensive research has shown that managers facing embarrassment or a
threat from new information (or from a new theory of managerial action) engage in
defensive routines to deny the legitimacy of the analysis. The defensive routines
inhibit the discovery of the underlying causes of the embarrassment and,
unfortunately, block learning and overprotect the participants from feeling responsible
for the consequences. Thus, along with developing knowledge and acceptance of the
technical aspects of ABC concepts and procedures, future management accountants
must also improve their organizational and behavioral skills so that they can recognize
and overcome organizational barriers to change.[8]
The balanced scorecard
A third innovation for future management accountants is the balanced scorecard,[9]
which takes as a starting point the notion that the overall goal of a corporation is to
generate long-term economic value. Thus, although quarterly and annual financial
measures of corporate performance will still be used to provide a report of current
operating performance, these financial measures need to be supplemented with the
drivers of long-term financial performance. These drivers of long-term performance--
especially the drivers of growth opportunities--require that measures other than
financial measures be identified.
Our initial taxonomy identified four perspectives of corporate performance objectives:
1. Financial: How do we crate value for shareholders?
2. Customers: What do existing and new customers value from us?
3. Internal: What processes must we excel at to achieve our financial and customer
objectives?
4. Innovation and learning: Can we continue to improve and create future value?
These four perspectives allow companies to specify objectives that balance short-term
financial performance with the drivers of long-term growth opportunities for future
financial performance.
More recent work has shown how the balanced scorecard has become much more
than an improved measurement system. Several companies are using it as their central
management system. Business units translate their mission and strategic objectives
into operational measures that signal the importance of forging new customer
relationships and excelling at a much broader set of internal processes. Existing
performance measurement systems, including those that derive process drivers from
an ABM approach, focus on improving existing processes. The balanced scorecard
approach not only sets priorities on which processes are most important to improve,
but it often identifies entirely new processes that must be established to achieve the
organization's breakthrough performance objectives for customers and shareholders.
The targets for the scorecard measures can be used to establish priorities for
reengineering and transformation projects. In this way, these extensive efforts can
focus on improving processes that are critical and strategic for business unit success.
The scorecard also provides the metrics--such as reduced time to market and shorter
order fulfillment cycles--that can be used to assess the benefits of reengineering and

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transformation projects. These measurements make it possible for transformation
projects to be something more than severe cost-cutting exercises.
Finally, the balanced scorecard can unify strategic planning and operational
budgeting, two management processes that formerly were distinct and virtually
unconnected. With the unified process, long-range strategic planning is performed
simultaneously with the coming year's budgeting process. The outcome from this
process is a set of operational measures and targets that must be achieved if the
business unit is to be on a trajectory for achieving its long-term plans. During the
year, monthly and quarterly reviews focus not only on performance against financial
targets but also on whether near-term targets, as in traditional budgeting, for customer
performance, internal process capabilities, innovation, and employee learning and
improvement are being met. The reviews assess whether the business unit is still on
the planned trajectory for achieving the long-term strategic goals.
Summary
Excellent management accounting systems cannot guarantee success in the
competitive environment of the 21st century Organizations will continue to succeed
and prosper by:
• Designing products and services that are valued by customers;
• Producing these products and services with efficient, high-quality, and responsive
operating processes; and
• Marketing, selling, and distributing their products and services effectively to
targeted customer segments.
Inadequate and distorted signals from management accounting systems, however,
will cause companies to encounter severe difficulties when performing these critical
organizational processes. The advances of the past ten years--including timely and
accurate operational control systems for learning and improvement, ABC systems,
and the balanced scorecard--make it possible for management accountants to:
• Become part of their organization's value-added team;
• Participate in the formulation and implementation of strategy;
• Translate strategic intent and capabilities into operational and managerial measures;
and
• Move away from being scorekeepers of the past and to become the designers of the
organization's critical management information systems.
If management accountants are to become effective members of the management
team, they have to spend less time dealing with financial accounting, auditing, and tax
issues. More of their time must be spent learning about product and process
technology, operations, systems, marketing, strategy, and the behavioral and
organizational issues relating to the implementation of new systems and processes.
The new opportunities for management accountants have developed rapidly during
the past ten years and will undoubtedly continue to evolve in the decades ahead.
Notes
1. R.S. Kaplan, "Texas Eastman Company," Harvard Business School Case #9-130-
039.
2. R.S. Kaplan and A.P. Sweeney, "Romeo Engine Plant," Harvard Business School
8
Case #9-194-032.
3. Robin Cooper, When Lean Enterprises Collide: Competing Through Confrontation
(Boston: Harvard Business School Press, 1995).
4. R. Cooper, "Cost Classifications in Unit-Based and Activity-Based Manufacturing
Cost Systems," Journal of Cost Management (Fall 1990): 4-14; also R. Cooper and
R.S. Kaplan, "Profit Priorities From Activity-Based Costing," Harvard Business
Review (May-June 1991): 130-135.
5. W. Skinner, "The Focused Factory," Harvard Business Review (May-June 1974):
113-21; R.H. Hayes and S.C. Wheelwright, "Link Manufacturing Process and Product
Life Cycles," Harvard Business Review (January-February 1979): 133-40.
6. R.S. Kaplan, "In Defense of ABCM," Management Accounting (November 1992):
58-63.
7. The distinction between the costs of supplying resources and the cost of using
resources appeared in R. Cooper and R.S. Kaplan, "Activity-Based Systems:
Measuring the Costs of Resource Usage," Accounting Horizons (September 1992): 1-
13.
8. Chris Argyris and Robert Kaplan, "Implementing New Ideas: The Case of Activity-
Based Cost Systems," Accounting Horizons (September 1994).
9. Robert S. Kaplan and David P. Norton, "The Balanced Scorecard: Measures That
Drive Performance," Harvard Business Review (January-February 1992): 71-79;
"Putting the Balanced Scorecard to Work," Harvard Business Review (September-
October 1993): 134-147.
~~~~~~~~
By Robert S. Kaplan
Robert S. Kaplan is the Arthur Lowes Dickinson Professor of Accounting at the
Graduate School of Business Administration, Harvard University, Boston.