SYNOPSIS ON YESTERDAY’S ACCOUNTING UNDERMINES PRODUCTION BY

ROBERT S. KAPLAN

Robert Kaplan kicked off his article by presenting, what he claims, to be the “largely
unnoticed—obstacle to the lasting success of this revolution in the organization and technology of
manufacturing operations”(Kaplan,1984, p.1), which is the continuous use of most companies of the
same cost accounting and management control systems that were developed during a different time
for a different time, making it incapable of competing to the more competitive environment of today.
Kaplan presented his point by using the cases of Acme Corporation and The Carmel Corporation.
Kaplan reiterated that the lack of development and modernization in the accounting and control
systems can result in misrepresentation of manufacturing performances.

Succeeding his preamble and presentation of the problem, the article then went on to his three
points. His first point, nonfinancial aspects of manufacturing performances, laid out considerations
measurement systems of today must take to create a system that will fit this era. According to Kaplan,
for a manufacturing company to succeed, it must be committed to embody quality, wherein everything
must conform to a standard and any change and data must be reported to maintain the quality. It must
also handle inventory better; a company could adapt the just-in-time inventory control systems that
are common among Japanese producers. He believes that taking a more direct measure will produce
a more efficient information. Since the current systems in place measure productivity by attributing
all productivity changes to labor, errors in approximation are often made which makes it impossible
to accurately measure the periodical changes in the productivity. As some companies rise through
competition through innovation, Kaplan wrote that it will be beneficial if cost accounting systems are
flexible to changes such as customization. As it is found to be difficult and a luxury for a manufacturer
to produce new products alongside the old ones when the new products are still under development,
companies should “learn to de-emphasize traditional cost measurements during the start-up phase of
new products and to monitor directly their performance, quality, and timely delivery.” (Kaplan,1984,
p.3). As it is impossible for existing cost accounting systems to measure skills, training, and morale,
the Work Force was the next consideration Kaplan deems to be. Kaplan believes that the employee’s
capabilities are as valuable as their tangible assets.

The article’s second point was the improvement of the control systems. His second point
revolves around how management control through ROI Control is falling apart and how it creates
apparent division from the manufacturing operations of a company. Due to the inflation after World
War II, repeated price increases resulted in a resolute bias to ROI. A recent phenomenon in the US
where the use of one department to collect and analyze data for both internal operations and external
reports presenting Financial Accounting Mentality caused distortions of economic performance. This
mentality causes the interest expense to be unfairly distributed withing departments. This mentality
can also cause poor cost accounting in the distribution of pension costs. As it is becoming harder for
companies to obtain profit through conventional means of selling, production, and research and
development, companies started taking shortcuts by obtaining profit through financial
entrepreneurship, which is another problem that is induced by ROI-based measurements. Instead of
managing assets better, they go through mergers and acquisitions, divestitures, spinoffs and many
more, and these shortcuts ultimately prevent companies from surviving as world-class competitors.
However, financial entrepreneurship is not the most fatal problem caused by ROI-based measures,
incentives to reduce expenditures on discretionary and intangible investments is. When a company is
in dire need of achieving profit targets, ROI-based measures suggests that a company cut
“expenditures on research and development, quality improvement, promotion, applications
engineering, human resources, and customer relations” (Kaplan,1984, p.6), which are all crucial to a
company’s long-term economic health.

The way I see it, Kaplan raises a good point of how the existing accounting systems are
outdated and incompatible to the era we currently live in. This article provided me with insightful
knowledge about the crucial role of accounting systems to companies. The suggestions he laid out
were convincing and rationalized by the examples and cases he used. His views on the matter were
informed and unbiased. The relevance of the problem was constantly reiterated throughout the article,
which was incredibly convincing. He raised that change must be made, accepted, and considered for
companies to survive and thrive as a world-class competitor.
References:

Kaplan, R. S. (1984). Yesterday's Accounting Undermines Production. Harvard Business

Review, 1-6.