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Accounting innovations and adaptations: A U.K. case
Management Accounting Research, 1991, 2, 15-26
Accounting innovations and adaptations: A U o K o case B. M. Kellett* and R. C. Sweeting* In this paper, the way in which a major U.K. electronics company has responded to the employment of a range of manufacturing technologies by adapting and innovating its managerial accounting techniques and practices are examined. The examination is set against the on-going debate in which the relevance of accounting techniques and practices in contemporary manufacturing organizations is being questioned. Evidence from the study suggests that practising accountants, exposed to and involved in the contemporary debate, are innovating, adapting and implementing advanced approaches to meet the demands of their environments and needs of their colleagues. In doing so they were observed, in this case, to adopt a gradual approach. This involved considerable experimentation, consultation and a pragmatic approach was taken to introducing accounting change. The introduction of accounting changes, as might be expected, met with mixed success. One of the main benefits was probably the increased dialogue the process generated between accountants and other managers in the organization. Key words: contemporary manufacturing accounting; managing accounting change.
1. Introduction
It is alleged that accountants and accounting can act to inhibit rather than facilitate the development and growth of innovative and entrepreneurial businesses [ l , 21, particularly those based in new technologies where adaptability and flexibility can be important determinants of success [3]. Alternative methods of accounting, for example activity-based accounting [4], have been suggested as alternative ways of providing management with more accurate and relevant information about internal costs in businesses employing advanced manufacturing technologies. This information may be used in a range of areas including product costing and performance assessment. This paper reports on a case study examination of one major U.K. electronics company. The aim of the study was to explore and understand the management accounting techniques and practices employed by the company and to determine the influence, if any, of the contemporary debate on the way managers cope with day to day and strategic problems of running these types of businesses. The paper is organized in the following way: in the first section the general background for suggested management accounting adaptations and innovations is briefly reviewed. *Manchester School of Management, UMIST, Sackville St, Manchester M60 IQD, U.K., correspondence should be addressed to RCS. Received 1 November 1990; accepted 24 January 1991.
0 1991 Academic Press Limited
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B. M. Kellett and R. C. Sweeting
This is followed by a presentation of case material which depicts the use of management accounting techniques and processes principally in the context of operational areas within a large new technology-based business. The case maierial examines the business at three levels: firstly, the company; secondly, a particular plant, and finally, one of the support services. This is followed by a discussion of the findings and our concluding comments.
2. Management accounting innovations and adaptations Over time, management accounting has developed somewhat to meet the needs of new production processes and organizational structures [5,6]. At the same time, cost and complexity have always limited the development of management accounting systems [7]. The development. and introduction of more complex and purportedly accurate systems will depend on the benefits and costs of such systems as perceived by managers. Horngren puts the matter in perspective in his comment The cost-benefit theme is the foundation for judging whether cost accounting systems should be revised. Many managers perceive rightly or wrongly that the costs of more elaborate systems exceed prospective benefits. [8]. In the last few years there has been increasing insistence by both accounting academics and practitioners that further accounting innovations are urgently required (see, for example, Johnson and Kaplan [9]). One of the major reasons put forward for this need for change is the perceived inaccuracy in costing caused by changes in the relative proportions of overhead, direct labour and materials costs, particularly within high technology companies, combined with the continued use of traditional allocation bases such as direct labour [lo]. Concern has been expressed over the use of allocation bases such as direct labour which may represent only a small proportion of the content of products [9-131. Whilst it may seem reasonable to deduce that such allocation bases will produce inaccurate product costs and poor management decisions [14], it is the correlation between the base and costs that is important not the relative size. Foster and Gupta [15] indicated that traditional allocation bases including direct labour had a relatively strong relationship to overheads albeit they represented only 6% of the costs of the manufacturing plants examined. Several writers have proposed alternative methods of cost allocation such as multiple allocation bases [ l l , 131, specific process or product level cost pools to which costs are directly attributed wherever feasible [13] and cost driver systems [9, 141. Another major area of concern is over the use of fully absorbed product costs. Coates et al. [16] and Scapens et al. [17] have identified the extensive use of fully absorbed costing systems in firms with little or no use of marginal or opportunity costs. For many years the use of marginal costs has been advocated as the academically sound method of costing for internal management decisions. There may be sound reasons for using fully absorbed costs. For example, they tend to be favoured for inventory valuation purposes, because accounting systems 'attach' costs to products as they flow through the manufacturing system. Dorward [18] has offered three reasons why fully allocated costs may be favoured in pricing decisions: they give cost standards which allow 'market acceptable' prices to be produced; they encourage price setting that will maintain price stability in oligopolistic markets; they are more likely to ensure the full recovery of overheads. All this is not to argue that accounting can be seen as some isolated collection of
Accounting Innovations and Adaptations
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techniques and practices. There is an accumulating literature which explores accounting as a form of social control.' Groups and individuals within organizations, and indeed interested outside groups: backers; customers; suppliers and so on may be expected to have differing needs and requirements and may be expected to wish to use accounting in different ways. Thus, cost effectiveness, accuracy and so on may not be a priority when it comes to individuals or groups wishing to further their own interests and influence others.*
3. The study The study was aimed at examining and understanding the accounting experience of managers in a manufacturing organization where there was an emphasis on new technology in products, processes and administration. It was not intended to prescribe relevant accounting techniques and practices but to understand the modus operandi of managers and consider this, where appropriate, against existing theory by a process of description and analysis of observed accounting practices and needs. The particular U.K. electronics company was chosen because: it was large; used advanced technology production techniques; might reasonably have been expected to have well-developed management accounting systems and employed professionals able to design, implement and operate such systems. Representatives of the company were also known to attend research forums where the latest developments in management accounting techniques and practices were discussed. The company organized its manufacturing and assembly at several manufacturing plants which were at different locations. Each of these plants made a distinct range of products. The plants as a whole were termed the Manufacturing Division of the company. In the study, one of the manufacturing plants, plant A, was examined along with one of the support services: the Supply Division. The chosen manufacturing plant had a turnover of approximately £100 million. Primary data collection was principally by means of a series of unstructured and semi-structured interviews with senior and middle-level managers. The company's management accountants were the main source of information concerning details of cost accounting techniques and practices employed. Interviews were also undertaken with engineering and technology managers involved with product development and manufacturing. Secondary information was obtained from: corporate archive material; published reports; technical publications and so on. Data collection and analysis took place over a 6 month period during 1988. Following the completion of data collection and initial analysis, a presentation was made to managers at the company (including senior and middle-level managers). Their feedback was assessed and incorporated into the findings and disucssions reported in this paper. 4. Case material The manufacturing division The research examined whether there had been a change in the relative proportions of manufacturing overhead, direct labour and material costs in the Manufacturing 'See, for example, Colignon and Covaleski [19]; for a discussion of the issues which this perception of accounting raises. See Hiromoto [20] for a review of Japanese management accounting practice. This author suggests that a main aim of Japanese management accounting may be to influence rather than i n f m those within organizations. An overall concern being that an external and strategic perspective is adopted.
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B. M. KeUett and R. C. Sweeting
Table 1 Relative proportion of manufacturing overhead, direct labour and material costs Cost category
Material Direct labour Overhead
Percentage of total manufacturing cost by year
77.4 3.9 18.7
77.0 3.7 19.3
73.7 3.5 22.8
74.9 3.4 21.7
74.7 3.0 22.3
" Budgeted figures.
Division in recent years. This data is shown in Table 1. There was a corporate policy of reducing direct labour and material costs of products over the period 1985-1988. The data exhibited an expected trend of slowly increasing overheads and decreasing direct labour costs but the overheads themselves were still not a major proportion of total costs and the rate of change was slow. The company used a fully absorbed costing system1 and detailed cost information was held on a generally accessible information technology (IT) facility. This facility held data on fixed and variable costs as well as cost breakdowns by component, material, labour and overhead content. Each plant had product costing managers whose function was to provide product costs to support the management decisions that were being made. Plant managers were responsible for total product cost regardless of whether the costs might traditionally be defined as fixed or variable, controllable or not. Costs used for transfer pricing were the fully absorbed costs. The company had taken action to limit the effect on costs of a number of structural features. For example, an extensive quality control scheme had been introduced in an effort to eliminate systematic causes of poor quality production as well as reducing rework and in-field engineering. Also, the costs of diversity of products were recognized and the company had mechanisms to resist the tendency for product pr~liferation.~ For example, major products were only introduced when there was a perceived marketing requirement for an acceptable volume of new products. There was also a tendency for designers to minimize the new components in new products, because of the difficulties of introducing new components including evaluation, procurement, documentation and time taken. Despite this, some product proliferation did occur in the lower cost products. However, the fact that these additional costs were not reflected in the formal costing system, did not prevent managers recognizing that they existed. Managers had identified additional costs associated with increased set-up times, increased storage locations and documentation, more transactions and so on. A further structural cost was design instability. The design of major new products was undertaken outside the production plants and great importance was attached to getting the initial design correct and avoiding costly late changes. Finally, components that
'
The full absorption costing system used by the company included, inter alia, the following overheads: central management costs; final product warehousing/inventory control costs and central purchasing function costs. Multiple bases were used to associate overhead costs with products. These included: direct labour hours; machine hours; direct material costs and cost driver analysis. For a detailed description of these see Kellett [21]. Product proliferation was cited by Johnson and Kaplan [9] as a major dysfunctional effect of arbitrary cost allocation systems.
Accounting Innovations and Adaptations
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could be produced within the company were produced in house only where they could be competitively priced and still provide an adequate return, or where other such as the protection of technology necessitated their in house production. Although all the managers at the company who were interviewed described their system as a fully allocated cost system, these costs were not used for all purposes. For example, marginal cost information from the IT database was used for make or buy decisions. As the need arose to make specific decisions, for example, quoting a transfer price of goods to another plant, costs were calculated on the latest information available. This ensured that, for instance, reductions in materials costs were reflected in quotations even if they were not yet reflected in the standard costs which were updated on a quarterly basis. The product costing manager at each plant provided this information to line managers, and whilst there was no evidence that these costs were modified by line management information, unexpectedly high or low costs were queried. This may point to one reason why formal marginal costing systems are difficult to operate. Management decisions requiring marginal cost information may be made relatively infrequently but require up to date and accurate information when they are made. Traditional accounting systems which rely on periodic updating of costs may be inadequate for this purpose. For product introduction decisions the fully absorbed costs were used as a proxy for long run marginal costs. Managers believed that this best reflected the longer term perspective of such decisions. One possible problem with this became evident when the introduction of a new manufacturing process was considered. There was an incentive to avoid using any new process because of the high overhead rates caused by high depreciation charges on new facilities and a low initial throughput which resulted in the components being more expensive than those manufactured by any old process that was still in operation. Accordingly, there was a belief that designers avoided using new processes because they were under a remit to minimize costs. The designers refuted this arguing that unreliability and, as a consequence, the possible failure to meet deadlines for the introduction of new equipment were more important reasons for not using new processes. Managers did not use marginal cost pricing for finished products. This was explained by management in three ways: The market for plant A's products, for example, was price inelastic and price cuts were unlikely to produce significantly increased sales. There was some fear of buyer collusion. Price cuts offered to one purchaser might become known to and demanded by others. Products were priced relative to competitors' prices: price cutting might result in a price war and lower margins for all producers. In the next section we describe the evolution of cost management systems against the changes in manufacturing and marketing requirements in one particular plant-plant A. It is not suggested that this plant is typical of all plants within the organization but it does illustrate the way in which cost management systems are developed in practice to 'fit' with their environment (see, also, McDonough [ 2 2 ] .
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B. M. Kellett and R. C . Sweeting
Manufacturing plant A Within plant A's costing system, fixed and variable costs were distinguished and were readily available from a computer database. Of the approximately 200 products produced by the plant, three product lines accounted for 50% of the plant output by cost. Products were priced at a level the market would bear and the price of competitors' products was the principal factor in deciding product price. Plant A produced high cost products which had good margins and were transferred at the fully absorbed cost to the Sales Division. It was the Sales Division who were expected to give appropriate discounts for large orders. Plant A had recently introduced changes to the bases on which overheads were allocated. The changes had been introduced in 1985 as the result of the introduction of several major new products which replaced existing ranges. The change was from an allocation base using direct labour hours to a multiple base comprising direct labour hours, material value and 'margin'. The last of these was a misnomer, in fact costs were allocated to product group cost pools and from there to products by an output value allocation base. The direct labour hour allocations followed a procedure whereby costs were allocated or attributed to the processes that caused them. This cost pool was then used to derive a standard rate based on expected workload in direct labour hours. The material value allocations involved a three stage process. The costs were attributed initially to processes and then to product group cost pools and finally to products by a material value allocation base. Because material value formed such a significant proportion of the total product cost and because most of the material related costs were allocated at each stage by a material or output value base, not surprisingly the result was that the material value standard rates were almost all the same; in effect a plant wide rate was being applied. In line with the management policy of reducing the manual assembly task on new products these products involved considerably less direct labour hours in their manufacture than the remaining (unreplaced) products that were still being manufactured. Because the allocation base used was direct labour hours this had meant that the unreplaced products suddenly attracted a significantly increased proportion of the overhead costs. Had the allocation base and the overhead costs been substantially causally related, any reduction in the overhead allocation base would have provided management with the opportunity to reduce overhead costs. However, in practice, overhead costs could not be reduced in line with the declining allocation base because the base was not a significant driver of the overhead cost. As a consequence new allocation bases were introduced to produce, in the words of the management, 'fair' product costs. What this seemed to mean to managers was product costs that were closer to those prevailing under the 'old' system prior to the introduction of new products. It was argued that, as an assembly plant, many of the costs of plant A were involved in the receipt, storage, issue and movement of material and thus a material-related base was appropriate. Further, managers argued that the new materialrelated base caused management attention to focus on reductions of material costs rather than on achieving minor decreases in direct labour hours that would merely lead to redistribution of overhead between products. Nevertheless, managers accepted that the material value was an arbitrary allocation base and that material weight, size or throughput, or even orders placed, received, stored and issued might be less arbitrary. Table 2 shows the effects on product costs of the new allocation system.
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Table 2 Effect on product costs of nao allocation g s t m at plant A
Item Standard hours to manufacture Materials content (5) Overhead under old system (&) Output value under old system (&) Overhead under new system (&) standard hours material valuea margin total Output value under new system (&) Change in overhead (%) Change in output value (%)
Product A (Unreplaced)
Product B (New)
Product C (New)
180 12.8
29 11.8
77 37.6
'The materials value allocation base had an arbitrary cut-off which was set at £X per component. Components with values above this level attracted overhead at a base value of .fX only. Thus different material value overhead rates were applicable to different products dependent upon the composition of components each contained. Note: All cost details have been modified by a constant factor to disguise the actual cost levels involved.
Whilst the figures have been altered in magnitude the percentage changes are those actually experienced in plant A. The change to a revised system of allocations seemed driven by a need to reverse the shift in product cost caused by the introduction of new products rather than because of any expected benefits from increased product cost accuracy. Managers at plant A had considered a cost driver approach to costing but had decided that the likely benefits were outweighed by the costs of introducing this type of system. In part this stems from the uses made of the cost system at plant A. Its primary purpose seemed to be to monitor reductions in product costs. As a consequence of this, product cost stability was needed to allow comparisons over time to be made. The use of cost information for other purposes was not given priority. For example, make or buy decisions were not frequently reviewed because for some products there was only one source of supply, for others in-house manufacture was the only option in order to protect technology. Finally, where in-house production had involved initial capital investment, it was unlikely that the marginal costs would exceed the external costs of supply for subsequent orders. Other decisions, for example, the introduction of major new products, were made only after extensive research involving a whole range of additional non-financial and qualitative factors including, inter alia: markets; production processes and quality. The major products of plant A were all high priced and had large margins. Changes in cost were considered irrelevant for ongoing pricing decisions which were mainly made on basis of the market price. Even radical changes to the costing system resulting in a 51% change in the overhead allocation to one product made only a 3.9% change in product cost (see Table 2). One of the main ways in which product cost distortions occur is where a failure to allocate batch costs properly causes high volume products to be allocated too much overhead and low volume products too little. At plant A, batch
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B. M. Kellett and R. C. Sweeting
set-up costs were allocated, where appropriate, through the calculation of a set-up time based on average batch size for each product which was then added to the standard direct labour hours on which overhead allocations were calculated. However, many of the costlier products were not produced in batches but on a free flow system involving no batch costs. Even if costs had been transferred from high volume to low volume products the effects on product profitability for the major products would have been of little significance. Thus to use the material value as an allocation base seemed logical: It helped to move costs back, albeit on an arbitrary basis, to the type of values which were reasonably expected by management. It was cheap since the data was already available. It probably helped to stabilize costs over time because the use of a variety of different allocation bases acted in a similar way to diversification in a portfolio by reducing the tendency for wild fluctuations. Finally, the switch to material value as an allocation base also appeared to move management attention away from searching for minor increases in labour productivity to achieving reductions in materials costs. This was desirable because materials constituted such a high proportion of product costs (70%). Thus, overall, the cost management system was blended to the environment of plant A and helped to facilitate the attainment of operational objectives and strategic goals.'
Support services-the Supply Division The cost allocation systems of three of the support services to the manufacturing plants were also examined. For each of the services, it had been established practice to use a transaction-based approach [23] to allocate costs to customer plants. A number of factors were considered by managers to influence costs and were taken account of in this processs. These factors included, inter alia: the number of orders placed; the processing capacity requested by day and night, respectively; the throughput of equipment. The operation of this type of cost allocation system was inevitably time consuming and costly. Evidence was found that managers sought to reduce their information costs by simplifying the method used. The Supply Division was an example of this. The Supply Division provided warehousing facilities for all other areas of the company. It had been the practice in the division to calculate the allocation of costs to its customer plants by using a transactions method. This method involved four main cost drivers2 and a number of minor adjustments to take account of special services and requirements of particular users. As a special exercise, the allocations were re-
'
All this is not to say that all plants in the Manufacturing Division had in place cost management systems which managers considered as suitable for their needs. In a brief review of another plant, plant B, managers there were struggling to adapt the existing cost management system. They wanted to correct distortions which they believed it created. Overhead allocation was based, to some extent, on direct labour which constituted only a relatively small proportion of the total product cost (see, also, Johnson and Kaplan [9]). To overcome their costing problems the managers were introducing some aspects of activity-based accounting. In doing so they were adopting an 'evolutionary' rather than 'revolutionary' approach (Bromwich and Bhimani [24]). Developments were at too early a stage at the time our research was undertaken for us to discern what the outcome might be. 'The main cost drivers were: the number of staff in the supply support area employed on work for each plant; a space related measure on which the warehousing costs of each user were based; a measure of volume and throughput to determine the handling costs associated with each user; the value of products associated with each user.
Accounting Innovations and Adaptations
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Table 3 Effect of using dzffient cost allocation bases in the Supply Division
User 1 2 3 4
5 6"
Transaction basis
(£o'w 2560 1010 1782 473 404 1 N.A.
Value basis
Volume basis
(&00W
(EOOc')
2787 913 1669 484 3927 86
776 1393 4537 207 2500 45 3
a User 6 was a newer user and data was not available to allow the calculation of the overhead allocation using the original method.
calculated using first the value and then the volume of material as alternative bases for cost allocations. Table 3 shows the results of these calculations. The Supply Division argued that because the transaction and value basis gave such similar allocations, and the latter was so much easier and cheaper to operate, that it should be used in preference to the other methods. A further argument put forward by managers was that because the Supply Division costs represented only a relatively small proportion of total costs, that any misallocation would only have an insignificant effect.
5. General comments There is an accumulating body of literature which suggests that innovation in products and processes necessitates changes in administration-in particular innovation and adaptation of accounting techniques and practices. A range of accounting developments have been suggested. One of these, activity-based accounting (ABC) has gained some prominence (see, for example [14]). While ABC may have conceptual merit,' even supporters recognize that neither it, nor many of the other suggested 'new' or advanced methods, have been widely tested in practice (see, for example [25]). Also, on a more generalized basis, there is some evidence to suggest that innovations based on 'technology push', which ABC seems mainly to be, are less likely to succeed than those based on 'market pull pull' [26]. In this paper, the case of an electronics company has been used to examine the problems and issues faced by management in a new technology-based business where accounting innovations and adaptations may, prima facie, be relevant and needed. The business employed new technology in its products, processes and administration. Representatives from the business had also been involved in a research consortium of accounting practitioners and academics whose aim was the conceptual development and implementation of advanced accounting methods. Senior managers were, therefore, aware of 'leading edge' thinking in this area. The business also employed substantial numbers of professional staff who were capable of designing and implementing advanced accounting practices and techniques where it was decided that they were relevant and appropriate. This research revealed that a range of so-called advanced and traditional management accounting techniques and practices can comfortably co-exist
'
The conditions for introducing ABC into particular organizations and the conceptual underpinnings for the technique continue to be the topics for debate (see, for example: Piper and Walley [27] and Cooper [28]).
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B. M. Kellett and R. C. Sweeting
and be used by managers where there is participation by users and designers in their introduction. Managers, in their attempts to get a better handle on costs, and so be better placed to control them without causing indiscriminate damage to critical success areas of the business, selectively introduced elements of advanced accounting techniques and practices-but not on a general basis. This gradualist approach was not, in our observation, caused by management inertia or lack of knowledge or expertise but a conscious decision that it was counter productive to introduce radical accounting changes which were costly either in monetary terms or disruptive to the production process itself which they aimed to improve. Changes in the cost management system were focused on achieving a 'fair' cost structure-ne that met general management acceptance and guided people towards achieving overall organizational strategic goals. This finding is consistent with similar observations (for example [20]) made in Japanese companies. It was our observation in plant A that there did not seem to be any distortion of key decision making by managers as a result of changing the method of cost allocation. The out turn of that decision-making was much as was to be expected by the managers concerned. It is suggested that the reason for this satisfactory state of affairs was that the accounting methods and output matched the requirements of managers and the criteria set by business operations. Managers in plant A did not have to face a range of competitors in a highly competitive market with consequent low margins, therefore slight cost distortions, if they were present, were not important. The cost structure at the plant was such that overheads were not the major element of the total product costs: material costs were the main element.' The focus of managers' attention was therefore, reasonably, on reducing material costs. In the Supply Division there was a move away from a detailed and sophisticated transaction-based cost allocation method towards a simpler, cheaper method based on material values. The simpler method, apparently, gave a similar result to the more detailed method. However, there were a number of potential problems with the more simple approach. Firstly, the detailed and simple methods might provide comparable results for the year when the exercise was undertaken, but this might not necessarily be the case for other years-in the past or the future. Secondly, no detailed work was done to check that the original factors required to determine cost allocations were really representative of the cost drivers to the Supply Division and whether the value of materials passing through the warehouses was indeed a good and reliable proxy for the cost drivers in that division. Finally, the argument that arbitrary allocation of Supply Division costs was irrelevant (in the context of the total costs) would only be valid if arbitrary allocations of all allocated costs were irrelevant since the cumulative effect of a number of arbitrary allocations could, in fact, be significant. 6. Concluding comments The descriptive material which we have presented in this paper corroborates the view that accounting occupies an 'informing' as well as an 'influencing' role in organizations
'
In this respect, plant A was different from types referred to by other authors, for example, Johnson and Kaplan [9], where overheads were typically much greater than direct labour costs. Plant B, which we briefly examined, did have relatively low direct labour costs and managers there were grappling with the problems of introducing activity-based accounting on a limited scale and in a gradual way to overcome perceived costing distortions.
Accounting Innovations and Adaptations
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[20]. Managers were satisfied not to implement elaborate, advanced accounting techniques and practices where simpler ones gave, in their opinion, satisfactory approximations for their needs. To some extent, output produced by management accounting techniques and practices was selected and used by senior managers to move the company generally in directions which they desired. Accounting acted to shape the company and the people within it in a dynamic and mutually interacting way (see, also, Colignon and Covaleski [191). One of the main benefits accruing from considering accounting changes and attempting to implement them may be the increased dialogue which is consequently generated between accountants and other managers. The case material revealed evidence of a merging and melding of 'traditional' and advanced management accounting techniques and practices: where the mix of these appeared to be based upon pragmatism rather than some systematic and possibly radical replacement policy. This finding supports the notion that the development and introduction of management accounting innovations and adaptations might be better approached in an 'evolutionary' rather than 'revolutionary' way [24]. In this way scope for experimentation and reassessment of the use of particular accounting techniques and practices may be achieved. Acknauledgements: The authors would like to acknowledge the co-operation of Mr. J. Townsley during the course of the research and the helpful and constructive comments given by Professor R. W. A. Scapens and Mr. F. Bailey on an earlier draft of this paper. The authors are also grateful for the revisions suggested by an anonymous referee. The usual caveats apply.
References 1. Hayes, R. H. and Abemathy, W. J. Managing our way to economic decline, The McKinsey Qwrterb, Spring, 2-23, 1981. 2. Kaplan, R. S. Yesterday's accounting undermines production, Hamard Business Review, July/August, pp 95-101, 1984. 3. Littler, D. A. and Sweeting, R. C. Management Accounting in Technology Based Businesses, London, CIMA, 1989. 4. Cooper, R. and Kaplan, R. S. How cost accounting systematically distorts product costs, in Bruns W. J. and Kaplan, R. S. (eds) Accounting and Management Field Study Perspectives, pp. 204-228, Cambridge, MA, Haward Business School Press 1987. 5. Johnson, H. T. Toward a new understanding of nineteenth-century cost accounting, The Accounting Review LVZ, 3 July, 5 10-5 18, 1981. 6. Loft, A. The history of management accounting: relevance found, in Ashton, D. et al. (eds) Issues in Management Accounting, Heme1 Hempstead, Prentice Hall, 1991. 7. Scapens, R. W. Management Accounting: A Review of Recent Developments, London, MacMillan, 1985. 8. Horngren, C. T. Cost and management accounting: yesterday and today, in Bromwich, M. and Hopwood, A. G. (eds) Research and Current Issues in Management Accounting, pp. 31-46, London, Pitman, 1986. 9. Johnson, H. T. and Kaplan, R. S. Relevance Lost: The Rise and Fall of Management Acunmting, Cambridge, MA, Haward Business School Press, 1987. 10. Brimson, J. A. How advanced manufacturing technologies are reshaping cost management, Management Accounting (NAA), March, 25-29, 1986. 11. Lammen, T. B. and Ehrsam, R. The human element: the real challenge in modernising cost systems, Management Accounting (NAA), 32-37, 1987. 12. Dilts, D. M. and Russell, G. W. Accounting for the factory of the future, Management Accmmting (NAA), April, 34-40, 1985. 13. Keys, D. E. Six problems in accounting for N/C machines, Management Accounting (NAA), November, pp 38-47, 1986.
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14. Cooper, R. and Kaplan, R. S. Measure costs right; make right decisions, Haward Business Review, September-October, 96-103, 1988. 15. Foster, G. and Gupta, M. Manufacturing overhead cost driver analysis, Unpublished paper presented at the Intensive Advanced Course on Cost Management and Product Cost Analysis in Advanced Manufacturing Environments, Brussels, June, 1988. 16. Coates, J. B., Rickwood, C. P. and Stacey, R. J. The use of cost behaviour analysis--case study evidence in Scapens, R., Cooper, D. and Arnold, J. (eds) Management Accounting: British Case Studies Volume 2, pp. 169-2 16, London, CIMA, 1986. 17. Scapens, R. W., Gameil, M. Y. and Cooper D. J. Accounting information for pricing decisions: an empirical study, in Cooper, D., Scapens, R. and Arnold, J. Management Accounting Research and Practice, London, CIMA, pp. 283-306, 1986. 18. Dorward, N. Overhead allocations and 'optimal' pricing rules of thumb in oligopolistic markets, Accounting and Business Research, Autumn, 309-3 17, 1986. 19. Colignon, R. and Covaleski, M. An examination of managerial accounting practices as a process of mutual adjustment, Accounting Organisations and Society, 13 (6), 559-579, 1988. 20. Hiromoto, T. Another hidden edge-Japanese management accounting, Haward Business Review, July-August, 22-26, 1988. 21. Kellett, B. M. Costing-a case study. Unpublished MSc dissertation, UMIST, Manchester, 1988. 22. McDonough, E. F. Matching management control systems to product strategies, R and D Management, 16 (2), 141-149, 1986. 23. Miller, J. G. and Vollman, T. E. The hidden factory, Haward Business Review, September-October, 142-150, 1985. 24. Bromwich, M. and Bhimani, A. Management Accounting: Evolution Not Revolution, London, CIMA, 1989. 25. Waller, D. Why manufacturing needs new accounts, Financial Times, 18 September, 15, 1989. 26. Twiss, B. Managing Technological Innovation, 3rd ed., London, Pitman, 1986. 27. Piper, J. A. andWalley, P. Testing ABC LO&, Management ~ccounting(U.K.), September, 37-42. 1990. 28. coope;, R. Explicating the logic of ABC, Managemat Accounting (U.K.), November, 58-60, 1990.
Accounting innovations and adaptations: A U o K o case B. M. Kellett* and R. C. Sweeting* In this paper, the way in which a major U.K. electronics company has responded to the employment of a range of manufacturing technologies by adapting and innovating its managerial accounting techniques and practices are examined. The examination is set against the on-going debate in which the relevance of accounting techniques and practices in contemporary manufacturing organizations is being questioned. Evidence from the study suggests that practising accountants, exposed to and involved in the contemporary debate, are innovating, adapting and implementing advanced approaches to meet the demands of their environments and needs of their colleagues. In doing so they were observed, in this case, to adopt a gradual approach. This involved considerable experimentation, consultation and a pragmatic approach was taken to introducing accounting change. The introduction of accounting changes, as might be expected, met with mixed success. One of the main benefits was probably the increased dialogue the process generated between accountants and other managers in the organization. Key words: contemporary manufacturing accounting; managing accounting change.
1. Introduction
It is alleged that accountants and accounting can act to inhibit rather than facilitate the development and growth of innovative and entrepreneurial businesses [ l , 21, particularly those based in new technologies where adaptability and flexibility can be important determinants of success [3]. Alternative methods of accounting, for example activity-based accounting [4], have been suggested as alternative ways of providing management with more accurate and relevant information about internal costs in businesses employing advanced manufacturing technologies. This information may be used in a range of areas including product costing and performance assessment. This paper reports on a case study examination of one major U.K. electronics company. The aim of the study was to explore and understand the management accounting techniques and practices employed by the company and to determine the influence, if any, of the contemporary debate on the way managers cope with day to day and strategic problems of running these types of businesses. The paper is organized in the following way: in the first section the general background for suggested management accounting adaptations and innovations is briefly reviewed. *Manchester School of Management, UMIST, Sackville St, Manchester M60 IQD, U.K., correspondence should be addressed to RCS. Received 1 November 1990; accepted 24 January 1991.
0 1991 Academic Press Limited
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B. M. Kellett and R. C. Sweeting
This is followed by a presentation of case material which depicts the use of management accounting techniques and processes principally in the context of operational areas within a large new technology-based business. The case maierial examines the business at three levels: firstly, the company; secondly, a particular plant, and finally, one of the support services. This is followed by a discussion of the findings and our concluding comments.
2. Management accounting innovations and adaptations Over time, management accounting has developed somewhat to meet the needs of new production processes and organizational structures [5,6]. At the same time, cost and complexity have always limited the development of management accounting systems [7]. The development. and introduction of more complex and purportedly accurate systems will depend on the benefits and costs of such systems as perceived by managers. Horngren puts the matter in perspective in his comment The cost-benefit theme is the foundation for judging whether cost accounting systems should be revised. Many managers perceive rightly or wrongly that the costs of more elaborate systems exceed prospective benefits. [8]. In the last few years there has been increasing insistence by both accounting academics and practitioners that further accounting innovations are urgently required (see, for example, Johnson and Kaplan [9]). One of the major reasons put forward for this need for change is the perceived inaccuracy in costing caused by changes in the relative proportions of overhead, direct labour and materials costs, particularly within high technology companies, combined with the continued use of traditional allocation bases such as direct labour [lo]. Concern has been expressed over the use of allocation bases such as direct labour which may represent only a small proportion of the content of products [9-131. Whilst it may seem reasonable to deduce that such allocation bases will produce inaccurate product costs and poor management decisions [14], it is the correlation between the base and costs that is important not the relative size. Foster and Gupta [15] indicated that traditional allocation bases including direct labour had a relatively strong relationship to overheads albeit they represented only 6% of the costs of the manufacturing plants examined. Several writers have proposed alternative methods of cost allocation such as multiple allocation bases [ l l , 131, specific process or product level cost pools to which costs are directly attributed wherever feasible [13] and cost driver systems [9, 141. Another major area of concern is over the use of fully absorbed product costs. Coates et al. [16] and Scapens et al. [17] have identified the extensive use of fully absorbed costing systems in firms with little or no use of marginal or opportunity costs. For many years the use of marginal costs has been advocated as the academically sound method of costing for internal management decisions. There may be sound reasons for using fully absorbed costs. For example, they tend to be favoured for inventory valuation purposes, because accounting systems 'attach' costs to products as they flow through the manufacturing system. Dorward [18] has offered three reasons why fully allocated costs may be favoured in pricing decisions: they give cost standards which allow 'market acceptable' prices to be produced; they encourage price setting that will maintain price stability in oligopolistic markets; they are more likely to ensure the full recovery of overheads. All this is not to argue that accounting can be seen as some isolated collection of
Accounting Innovations and Adaptations
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techniques and practices. There is an accumulating literature which explores accounting as a form of social control.' Groups and individuals within organizations, and indeed interested outside groups: backers; customers; suppliers and so on may be expected to have differing needs and requirements and may be expected to wish to use accounting in different ways. Thus, cost effectiveness, accuracy and so on may not be a priority when it comes to individuals or groups wishing to further their own interests and influence others.*
3. The study The study was aimed at examining and understanding the accounting experience of managers in a manufacturing organization where there was an emphasis on new technology in products, processes and administration. It was not intended to prescribe relevant accounting techniques and practices but to understand the modus operandi of managers and consider this, where appropriate, against existing theory by a process of description and analysis of observed accounting practices and needs. The particular U.K. electronics company was chosen because: it was large; used advanced technology production techniques; might reasonably have been expected to have well-developed management accounting systems and employed professionals able to design, implement and operate such systems. Representatives of the company were also known to attend research forums where the latest developments in management accounting techniques and practices were discussed. The company organized its manufacturing and assembly at several manufacturing plants which were at different locations. Each of these plants made a distinct range of products. The plants as a whole were termed the Manufacturing Division of the company. In the study, one of the manufacturing plants, plant A, was examined along with one of the support services: the Supply Division. The chosen manufacturing plant had a turnover of approximately £100 million. Primary data collection was principally by means of a series of unstructured and semi-structured interviews with senior and middle-level managers. The company's management accountants were the main source of information concerning details of cost accounting techniques and practices employed. Interviews were also undertaken with engineering and technology managers involved with product development and manufacturing. Secondary information was obtained from: corporate archive material; published reports; technical publications and so on. Data collection and analysis took place over a 6 month period during 1988. Following the completion of data collection and initial analysis, a presentation was made to managers at the company (including senior and middle-level managers). Their feedback was assessed and incorporated into the findings and disucssions reported in this paper. 4. Case material The manufacturing division The research examined whether there had been a change in the relative proportions of manufacturing overhead, direct labour and material costs in the Manufacturing 'See, for example, Colignon and Covaleski [19]; for a discussion of the issues which this perception of accounting raises. See Hiromoto [20] for a review of Japanese management accounting practice. This author suggests that a main aim of Japanese management accounting may be to influence rather than i n f m those within organizations. An overall concern being that an external and strategic perspective is adopted.
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B. M. KeUett and R. C. Sweeting
Table 1 Relative proportion of manufacturing overhead, direct labour and material costs Cost category
Material Direct labour Overhead
Percentage of total manufacturing cost by year
77.4 3.9 18.7
77.0 3.7 19.3
73.7 3.5 22.8
74.9 3.4 21.7
74.7 3.0 22.3
" Budgeted figures.
Division in recent years. This data is shown in Table 1. There was a corporate policy of reducing direct labour and material costs of products over the period 1985-1988. The data exhibited an expected trend of slowly increasing overheads and decreasing direct labour costs but the overheads themselves were still not a major proportion of total costs and the rate of change was slow. The company used a fully absorbed costing system1 and detailed cost information was held on a generally accessible information technology (IT) facility. This facility held data on fixed and variable costs as well as cost breakdowns by component, material, labour and overhead content. Each plant had product costing managers whose function was to provide product costs to support the management decisions that were being made. Plant managers were responsible for total product cost regardless of whether the costs might traditionally be defined as fixed or variable, controllable or not. Costs used for transfer pricing were the fully absorbed costs. The company had taken action to limit the effect on costs of a number of structural features. For example, an extensive quality control scheme had been introduced in an effort to eliminate systematic causes of poor quality production as well as reducing rework and in-field engineering. Also, the costs of diversity of products were recognized and the company had mechanisms to resist the tendency for product pr~liferation.~ For example, major products were only introduced when there was a perceived marketing requirement for an acceptable volume of new products. There was also a tendency for designers to minimize the new components in new products, because of the difficulties of introducing new components including evaluation, procurement, documentation and time taken. Despite this, some product proliferation did occur in the lower cost products. However, the fact that these additional costs were not reflected in the formal costing system, did not prevent managers recognizing that they existed. Managers had identified additional costs associated with increased set-up times, increased storage locations and documentation, more transactions and so on. A further structural cost was design instability. The design of major new products was undertaken outside the production plants and great importance was attached to getting the initial design correct and avoiding costly late changes. Finally, components that
'
The full absorption costing system used by the company included, inter alia, the following overheads: central management costs; final product warehousing/inventory control costs and central purchasing function costs. Multiple bases were used to associate overhead costs with products. These included: direct labour hours; machine hours; direct material costs and cost driver analysis. For a detailed description of these see Kellett [21]. Product proliferation was cited by Johnson and Kaplan [9] as a major dysfunctional effect of arbitrary cost allocation systems.
Accounting Innovations and Adaptations
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could be produced within the company were produced in house only where they could be competitively priced and still provide an adequate return, or where other such as the protection of technology necessitated their in house production. Although all the managers at the company who were interviewed described their system as a fully allocated cost system, these costs were not used for all purposes. For example, marginal cost information from the IT database was used for make or buy decisions. As the need arose to make specific decisions, for example, quoting a transfer price of goods to another plant, costs were calculated on the latest information available. This ensured that, for instance, reductions in materials costs were reflected in quotations even if they were not yet reflected in the standard costs which were updated on a quarterly basis. The product costing manager at each plant provided this information to line managers, and whilst there was no evidence that these costs were modified by line management information, unexpectedly high or low costs were queried. This may point to one reason why formal marginal costing systems are difficult to operate. Management decisions requiring marginal cost information may be made relatively infrequently but require up to date and accurate information when they are made. Traditional accounting systems which rely on periodic updating of costs may be inadequate for this purpose. For product introduction decisions the fully absorbed costs were used as a proxy for long run marginal costs. Managers believed that this best reflected the longer term perspective of such decisions. One possible problem with this became evident when the introduction of a new manufacturing process was considered. There was an incentive to avoid using any new process because of the high overhead rates caused by high depreciation charges on new facilities and a low initial throughput which resulted in the components being more expensive than those manufactured by any old process that was still in operation. Accordingly, there was a belief that designers avoided using new processes because they were under a remit to minimize costs. The designers refuted this arguing that unreliability and, as a consequence, the possible failure to meet deadlines for the introduction of new equipment were more important reasons for not using new processes. Managers did not use marginal cost pricing for finished products. This was explained by management in three ways: The market for plant A's products, for example, was price inelastic and price cuts were unlikely to produce significantly increased sales. There was some fear of buyer collusion. Price cuts offered to one purchaser might become known to and demanded by others. Products were priced relative to competitors' prices: price cutting might result in a price war and lower margins for all producers. In the next section we describe the evolution of cost management systems against the changes in manufacturing and marketing requirements in one particular plant-plant A. It is not suggested that this plant is typical of all plants within the organization but it does illustrate the way in which cost management systems are developed in practice to 'fit' with their environment (see, also, McDonough [ 2 2 ] .
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B. M. Kellett and R. C . Sweeting
Manufacturing plant A Within plant A's costing system, fixed and variable costs were distinguished and were readily available from a computer database. Of the approximately 200 products produced by the plant, three product lines accounted for 50% of the plant output by cost. Products were priced at a level the market would bear and the price of competitors' products was the principal factor in deciding product price. Plant A produced high cost products which had good margins and were transferred at the fully absorbed cost to the Sales Division. It was the Sales Division who were expected to give appropriate discounts for large orders. Plant A had recently introduced changes to the bases on which overheads were allocated. The changes had been introduced in 1985 as the result of the introduction of several major new products which replaced existing ranges. The change was from an allocation base using direct labour hours to a multiple base comprising direct labour hours, material value and 'margin'. The last of these was a misnomer, in fact costs were allocated to product group cost pools and from there to products by an output value allocation base. The direct labour hour allocations followed a procedure whereby costs were allocated or attributed to the processes that caused them. This cost pool was then used to derive a standard rate based on expected workload in direct labour hours. The material value allocations involved a three stage process. The costs were attributed initially to processes and then to product group cost pools and finally to products by a material value allocation base. Because material value formed such a significant proportion of the total product cost and because most of the material related costs were allocated at each stage by a material or output value base, not surprisingly the result was that the material value standard rates were almost all the same; in effect a plant wide rate was being applied. In line with the management policy of reducing the manual assembly task on new products these products involved considerably less direct labour hours in their manufacture than the remaining (unreplaced) products that were still being manufactured. Because the allocation base used was direct labour hours this had meant that the unreplaced products suddenly attracted a significantly increased proportion of the overhead costs. Had the allocation base and the overhead costs been substantially causally related, any reduction in the overhead allocation base would have provided management with the opportunity to reduce overhead costs. However, in practice, overhead costs could not be reduced in line with the declining allocation base because the base was not a significant driver of the overhead cost. As a consequence new allocation bases were introduced to produce, in the words of the management, 'fair' product costs. What this seemed to mean to managers was product costs that were closer to those prevailing under the 'old' system prior to the introduction of new products. It was argued that, as an assembly plant, many of the costs of plant A were involved in the receipt, storage, issue and movement of material and thus a material-related base was appropriate. Further, managers argued that the new materialrelated base caused management attention to focus on reductions of material costs rather than on achieving minor decreases in direct labour hours that would merely lead to redistribution of overhead between products. Nevertheless, managers accepted that the material value was an arbitrary allocation base and that material weight, size or throughput, or even orders placed, received, stored and issued might be less arbitrary. Table 2 shows the effects on product costs of the new allocation system.
Accounting Innovations and Adaptations
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Table 2 Effect on product costs of nao allocation g s t m at plant A
Item Standard hours to manufacture Materials content (5) Overhead under old system (&) Output value under old system (&) Overhead under new system (&) standard hours material valuea margin total Output value under new system (&) Change in overhead (%) Change in output value (%)
Product A (Unreplaced)
Product B (New)
Product C (New)
180 12.8
29 11.8
77 37.6
'The materials value allocation base had an arbitrary cut-off which was set at £X per component. Components with values above this level attracted overhead at a base value of .fX only. Thus different material value overhead rates were applicable to different products dependent upon the composition of components each contained. Note: All cost details have been modified by a constant factor to disguise the actual cost levels involved.
Whilst the figures have been altered in magnitude the percentage changes are those actually experienced in plant A. The change to a revised system of allocations seemed driven by a need to reverse the shift in product cost caused by the introduction of new products rather than because of any expected benefits from increased product cost accuracy. Managers at plant A had considered a cost driver approach to costing but had decided that the likely benefits were outweighed by the costs of introducing this type of system. In part this stems from the uses made of the cost system at plant A. Its primary purpose seemed to be to monitor reductions in product costs. As a consequence of this, product cost stability was needed to allow comparisons over time to be made. The use of cost information for other purposes was not given priority. For example, make or buy decisions were not frequently reviewed because for some products there was only one source of supply, for others in-house manufacture was the only option in order to protect technology. Finally, where in-house production had involved initial capital investment, it was unlikely that the marginal costs would exceed the external costs of supply for subsequent orders. Other decisions, for example, the introduction of major new products, were made only after extensive research involving a whole range of additional non-financial and qualitative factors including, inter alia: markets; production processes and quality. The major products of plant A were all high priced and had large margins. Changes in cost were considered irrelevant for ongoing pricing decisions which were mainly made on basis of the market price. Even radical changes to the costing system resulting in a 51% change in the overhead allocation to one product made only a 3.9% change in product cost (see Table 2). One of the main ways in which product cost distortions occur is where a failure to allocate batch costs properly causes high volume products to be allocated too much overhead and low volume products too little. At plant A, batch
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B. M. Kellett and R. C. Sweeting
set-up costs were allocated, where appropriate, through the calculation of a set-up time based on average batch size for each product which was then added to the standard direct labour hours on which overhead allocations were calculated. However, many of the costlier products were not produced in batches but on a free flow system involving no batch costs. Even if costs had been transferred from high volume to low volume products the effects on product profitability for the major products would have been of little significance. Thus to use the material value as an allocation base seemed logical: It helped to move costs back, albeit on an arbitrary basis, to the type of values which were reasonably expected by management. It was cheap since the data was already available. It probably helped to stabilize costs over time because the use of a variety of different allocation bases acted in a similar way to diversification in a portfolio by reducing the tendency for wild fluctuations. Finally, the switch to material value as an allocation base also appeared to move management attention away from searching for minor increases in labour productivity to achieving reductions in materials costs. This was desirable because materials constituted such a high proportion of product costs (70%). Thus, overall, the cost management system was blended to the environment of plant A and helped to facilitate the attainment of operational objectives and strategic goals.'
Support services-the Supply Division The cost allocation systems of three of the support services to the manufacturing plants were also examined. For each of the services, it had been established practice to use a transaction-based approach [23] to allocate costs to customer plants. A number of factors were considered by managers to influence costs and were taken account of in this processs. These factors included, inter alia: the number of orders placed; the processing capacity requested by day and night, respectively; the throughput of equipment. The operation of this type of cost allocation system was inevitably time consuming and costly. Evidence was found that managers sought to reduce their information costs by simplifying the method used. The Supply Division was an example of this. The Supply Division provided warehousing facilities for all other areas of the company. It had been the practice in the division to calculate the allocation of costs to its customer plants by using a transactions method. This method involved four main cost drivers2 and a number of minor adjustments to take account of special services and requirements of particular users. As a special exercise, the allocations were re-
'
All this is not to say that all plants in the Manufacturing Division had in place cost management systems which managers considered as suitable for their needs. In a brief review of another plant, plant B, managers there were struggling to adapt the existing cost management system. They wanted to correct distortions which they believed it created. Overhead allocation was based, to some extent, on direct labour which constituted only a relatively small proportion of the total product cost (see, also, Johnson and Kaplan [9]). To overcome their costing problems the managers were introducing some aspects of activity-based accounting. In doing so they were adopting an 'evolutionary' rather than 'revolutionary' approach (Bromwich and Bhimani [24]). Developments were at too early a stage at the time our research was undertaken for us to discern what the outcome might be. 'The main cost drivers were: the number of staff in the supply support area employed on work for each plant; a space related measure on which the warehousing costs of each user were based; a measure of volume and throughput to determine the handling costs associated with each user; the value of products associated with each user.
Accounting Innovations and Adaptations
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Table 3 Effect of using dzffient cost allocation bases in the Supply Division
User 1 2 3 4
5 6"
Transaction basis
(£o'w 2560 1010 1782 473 404 1 N.A.
Value basis
Volume basis
(&00W
(EOOc')
2787 913 1669 484 3927 86
776 1393 4537 207 2500 45 3
a User 6 was a newer user and data was not available to allow the calculation of the overhead allocation using the original method.
calculated using first the value and then the volume of material as alternative bases for cost allocations. Table 3 shows the results of these calculations. The Supply Division argued that because the transaction and value basis gave such similar allocations, and the latter was so much easier and cheaper to operate, that it should be used in preference to the other methods. A further argument put forward by managers was that because the Supply Division costs represented only a relatively small proportion of total costs, that any misallocation would only have an insignificant effect.
5. General comments There is an accumulating body of literature which suggests that innovation in products and processes necessitates changes in administration-in particular innovation and adaptation of accounting techniques and practices. A range of accounting developments have been suggested. One of these, activity-based accounting (ABC) has gained some prominence (see, for example [14]). While ABC may have conceptual merit,' even supporters recognize that neither it, nor many of the other suggested 'new' or advanced methods, have been widely tested in practice (see, for example [25]). Also, on a more generalized basis, there is some evidence to suggest that innovations based on 'technology push', which ABC seems mainly to be, are less likely to succeed than those based on 'market pull pull' [26]. In this paper, the case of an electronics company has been used to examine the problems and issues faced by management in a new technology-based business where accounting innovations and adaptations may, prima facie, be relevant and needed. The business employed new technology in its products, processes and administration. Representatives from the business had also been involved in a research consortium of accounting practitioners and academics whose aim was the conceptual development and implementation of advanced accounting methods. Senior managers were, therefore, aware of 'leading edge' thinking in this area. The business also employed substantial numbers of professional staff who were capable of designing and implementing advanced accounting practices and techniques where it was decided that they were relevant and appropriate. This research revealed that a range of so-called advanced and traditional management accounting techniques and practices can comfortably co-exist
'
The conditions for introducing ABC into particular organizations and the conceptual underpinnings for the technique continue to be the topics for debate (see, for example: Piper and Walley [27] and Cooper [28]).
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B. M. Kellett and R. C. Sweeting
and be used by managers where there is participation by users and designers in their introduction. Managers, in their attempts to get a better handle on costs, and so be better placed to control them without causing indiscriminate damage to critical success areas of the business, selectively introduced elements of advanced accounting techniques and practices-but not on a general basis. This gradualist approach was not, in our observation, caused by management inertia or lack of knowledge or expertise but a conscious decision that it was counter productive to introduce radical accounting changes which were costly either in monetary terms or disruptive to the production process itself which they aimed to improve. Changes in the cost management system were focused on achieving a 'fair' cost structure-ne that met general management acceptance and guided people towards achieving overall organizational strategic goals. This finding is consistent with similar observations (for example [20]) made in Japanese companies. It was our observation in plant A that there did not seem to be any distortion of key decision making by managers as a result of changing the method of cost allocation. The out turn of that decision-making was much as was to be expected by the managers concerned. It is suggested that the reason for this satisfactory state of affairs was that the accounting methods and output matched the requirements of managers and the criteria set by business operations. Managers in plant A did not have to face a range of competitors in a highly competitive market with consequent low margins, therefore slight cost distortions, if they were present, were not important. The cost structure at the plant was such that overheads were not the major element of the total product costs: material costs were the main element.' The focus of managers' attention was therefore, reasonably, on reducing material costs. In the Supply Division there was a move away from a detailed and sophisticated transaction-based cost allocation method towards a simpler, cheaper method based on material values. The simpler method, apparently, gave a similar result to the more detailed method. However, there were a number of potential problems with the more simple approach. Firstly, the detailed and simple methods might provide comparable results for the year when the exercise was undertaken, but this might not necessarily be the case for other years-in the past or the future. Secondly, no detailed work was done to check that the original factors required to determine cost allocations were really representative of the cost drivers to the Supply Division and whether the value of materials passing through the warehouses was indeed a good and reliable proxy for the cost drivers in that division. Finally, the argument that arbitrary allocation of Supply Division costs was irrelevant (in the context of the total costs) would only be valid if arbitrary allocations of all allocated costs were irrelevant since the cumulative effect of a number of arbitrary allocations could, in fact, be significant. 6. Concluding comments The descriptive material which we have presented in this paper corroborates the view that accounting occupies an 'informing' as well as an 'influencing' role in organizations
'
In this respect, plant A was different from types referred to by other authors, for example, Johnson and Kaplan [9], where overheads were typically much greater than direct labour costs. Plant B, which we briefly examined, did have relatively low direct labour costs and managers there were grappling with the problems of introducing activity-based accounting on a limited scale and in a gradual way to overcome perceived costing distortions.
Accounting Innovations and Adaptations
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[20]. Managers were satisfied not to implement elaborate, advanced accounting techniques and practices where simpler ones gave, in their opinion, satisfactory approximations for their needs. To some extent, output produced by management accounting techniques and practices was selected and used by senior managers to move the company generally in directions which they desired. Accounting acted to shape the company and the people within it in a dynamic and mutually interacting way (see, also, Colignon and Covaleski [191). One of the main benefits accruing from considering accounting changes and attempting to implement them may be the increased dialogue which is consequently generated between accountants and other managers. The case material revealed evidence of a merging and melding of 'traditional' and advanced management accounting techniques and practices: where the mix of these appeared to be based upon pragmatism rather than some systematic and possibly radical replacement policy. This finding supports the notion that the development and introduction of management accounting innovations and adaptations might be better approached in an 'evolutionary' rather than 'revolutionary' way [24]. In this way scope for experimentation and reassessment of the use of particular accounting techniques and practices may be achieved. Acknauledgements: The authors would like to acknowledge the co-operation of Mr. J. Townsley during the course of the research and the helpful and constructive comments given by Professor R. W. A. Scapens and Mr. F. Bailey on an earlier draft of this paper. The authors are also grateful for the revisions suggested by an anonymous referee. The usual caveats apply.
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