36 M a n a g e m e n t A c c o u n t i n g in In d o n esia: A n a l y s i s of.

M anagem ent A ccounting in Indonesia: A nalysis o f Current

System s, Potential for Change and Forces behind Innovation*

Jo h n n y J erm ia s, P h.D **
STA N & UPI YAI, Jakarta, Indonesia/
Simon Fraser U niversity
Faculty o f Business A dm inistration
Burnaby, British C olum bia, C anada,

And

H ow ard M . A rm ita g e, P h .D , F C M A
U niversity o f W aterloo
School o f A cco un tan cy
W aterloo, Ontario, C anada,

A b str a c t

The paper begins with a description of the current practice of

management accounting in Indonesia and the degree to which management
accounting systems and management accountants are expected to change
during the next five years. This is followed by an empirical examination of
the relationship between management accounting innovation in Indonesia
and such factors as organization hierarchy, system design, company
performance, size, and age.

As predicted, results from this study indicated that the level of

management accounting system innovation can be predicted by the level of
hierarchy and the nature of organizational design. Increased hierarchy has a
negative association with innovation in management accounting systems.
Similarly, organizations that are process oriented use more innovative
management accounting systems than functionally oriented organization.

Key words: innovation, management accounting, hierarchy, Indonesia.

* We would like to thank Indonesian Federation of Accountants (IAI) for helping us gaining
access to the respondents. We also gratefully acknowledge the International Federation of
Accountants (IFAC) for helping with the funding for this study. The paper also benefited from
comments and suggestions of accounting workshop participants at Faculty of Business
Administration, Simon Fraser University.
** The survey instrument and data are available from the first author upon request.

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1. In tro d u ctio n

Researchers and practitioners have argued that effective m a n a g e m e n t

accou ntin g system s contribute to increasing co m p etitiv en ess (e.g., Elliot, 1992;
Shank & G ov in darajan. 1989; Johnson & Kaplan, 1987). Effective m a n a g e m e n t
a ccoun ting system s also help m anagers m ake better decisions (Jerm ias, 2000; Kaplan
& A tkinson, 1998) and support c om p a ny strategies such as con tinu ou s im pro vem en t,
high quality, and c u sto m e r satisfaction (A tkinson, W aterho use and Wells, 1997). To
be relevant in an ev er c hang in g en vironm ent, m a n a g e m e n t accou ntin g sy stem s have
to satisfy m anagers' d e m a n d s for inform ation that leads to d oing things better and to
doing better things. H ow ever, there is som e evidence to suggest that m a n a g e m e n t
accounting, as a tool for m anagerial effectiveness and efficiency, is virtually n o n ­
existent in Indonesia ( A bd oelkadir & Y unus, 1994).

The study consists o f two phases. First is a description o f the current practice
o f m a n a g e m e n t accou ntin g in Indonesia and the degree to w hich m a n a g e m e n t
a c c ou ntin g system s and m a n a g e m e n t accountants are expected to c h ang e d uring the
next five years. This represents the first em pirical investigation o f the m a n a g e m e n t
accou ntin g e n v iro n m e n t in publicly held com p a nie s in Indonesia. Second, the paper
a dv an ces and tests a n um ber o f hypotheses con cerning the relationship betw een
m a n a g e m e n t a c c ou ntin g innovation in Indonesia and such factors as organization
hierarchy, system s design, c o m p a n y perform ance, size and age.

2. P hase 1 - R esearch m eth od s and d ata co llection

A survey instrum ent w as used to gather information from c o m p a n ie s listed

on the Jakarta Stock Exchange. Two hundred and fifty three c o m p a n ie s received
question naires in April 1997. The survey instrum ent w as a variation o f a
question naire develo ped by A rm itage (1994) and was translated into the Indonesian
language. The question naires were sent to the "M an a g e r o f Finance" or e qu iv ale nt in
each co m pany . Each questionnaire consisted o f three sections. The first section asked
for de m og ra p hic information about the com pany. The second section requested
inform ation about the role o f the m a n a g e m en t accou ntin g system and about the role
o f the m a n a g e m e n t accou ntin g group within the c om pany. The last section sought
inform ation on the extent to which new initiatives in m a n a g em e n t a c c o unting w ere
being adopted by the firm.

R espondents were sent the questionnaire along with a pre-stam p ed return

envelo pe and were asked to return the qu estionnaires within three weeks. O ut o f 253
question naires sent, 39 total usable responses w ere received resulting in an overall
response rate o f slightly over 15%. A lthough this response rate m ay be considered
low by North A m erican standards, it is consistent w ith, and even slightly h igher than,
other research ex periences in Indonesia. For exam ple, a recent survey c on ducted by

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the State School o f A cco un tancy (S T A N ) obtained only a 10% response rate.
R esp on ding to survey type research is not yet a c o m m o n practice by Indonesian
firms. Inform al discussions indicate that som e m an ag ers have concerns about the use
to w hich survey inform ation is to be put. O ther Indonesian m anagers do not believe
their c o m p a n y can benefit from participating in acad em ic research activities and
so m e do not participate because they feel that academ ic research findings are not
being adequ ately com m u n ic a te d to the respondents.

The researchers knew these limitations in advance. H ow ever, the size o f the
c ountry (Indo nesia crosses four tim e zones), the nature o f the research question s and
the limited research budget m ade survey research the only feasible approach to data
gathering.

3. D ata A n a ly sis and R esu lts

a. Characteristics of the respondents

Thirty nine usable questionnaires, or 15.42%, w ere returned and included in

the sam ple. T hey are representative o f the population surveyed in this study in term s
o f industry classification. Figure 1 show s the com parison betw een surveyed and
resp on ding firms with regard to industry classification.

|In se r t F igu re 1 here]

A m ajority o f the respondents were from the m an ufactu ring sector (19
c o m p a n ie s or 48 .72 % ), follow ed by fin ancial/banking (6 c om panies or 15.38%) and
trading (4 c o m p a n ie s or 10.26%). O ther industry sectors accounted for less than 10%
o f the total response. In term s o f years in operations, 95% o f the respondents
indicated that their organization had been in business for m ore than 10 years, a
period that can be considered long enough to establish a presence in the m arket and
to have d eveloped internal accounting system s and policies. M ost co m p a n ie s em ploy
b etw een 501 to 5,000 e m p lo yees (25 com p anies or 64.1% ) while tw o com p a nie s
em p lo y m ore than 10,000 em ployees. In term s o f total assets, a m ajority o f the
resp ond en ts (7 6 .9 3 % ) have total assets m ore than US$ 41,000,000.

In su m m ary , the data consists o f a significant proportion o f m a n u factu rin g

(4 8 .7 2 % ) and financial and banking (15 .38 % ) com panies. In addition, m ost
c o m p a n ie s have been in business for m ore than ten years and are considered m edium
to large size c o m p an ie s in Indonesia in term s o f total assets, sales, and n um b e r o f
e m ployees.

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h. Management St rue lure and Relative Performance o f the Respondents

For m an y years, m a n a g e m e n t accoun ting in Indonesia has been subordinated

to financial accou ntin g requirem ents. C o m pa n ie s have been m ore co ncerned with
inventory valuation and financial statem ent preparation for external users than with
providing inform ation for internal purposes.

In recent years, however, com petition has intensified and business

en v iro n m e n ts have changed. T h ro ug hou t the world, m anag ers are d e m a n d in g m ore
frequent, timely and higher quality inform ation for internal m a n a g e m e n t and
decision m aking purposes. C h an ges in com petition and the business e n v iro n m e n t
have also had a profound effect on m a n a g e m e n t a cco un ting sy stem s and
m a n ag e m e n t a cc o un ting groups. For exam ple, m any recent innovations stress
m o v in g from the "functional silo" approach to m a n a g e m e n t to m a n a g in g the value
chain which implies activity or process accounting, o f interest to this research is the
degree to w hich m a n a g e m en t acco un ting system s and m a n a g e m e n t a cc o un ting
groups in Indonesia are structured and the degree to which they are ch an g in g their
accou ntin g system s to respond to this change. To put this in perspective, a n u m b e r o f
question s w ere first asked relating to m an a g e m e n t structure and relative
perform ance.

T he m ajority o f the responding co m pa n ie s (7 6.92 % ) are p rim arily m anag ed

by function (i.e., production, m arketing, finance). O nly 2 0 .51% are m an ag ed by
process. The rest are a com bination o f the two.

This functional orientation is consistent with the ch aracteristics o f the

respon ding com p an ie s in term s o f level o f hierarchies. G en erally speaking,
functionally oriented firms have m ore pronounced levels o f hierarchy than process
oriented firms. In this data, it is interesting to note that 22 c o m p a n ie s (5 8 % ) have six
or m ore levels o f hierarchy and the rest have 3-5 level o f hierarchy.

T he ultim ate goal o f m ost c om p a nie s is to m ax im ise sh areh older wealth.

A c hie ving this goal requires that firms outperform their com petitors. T o m e a su re an
o r g a n is a tio n ’s relative perform ance, respondents were asked to rank the perfo rm a n c e
o f their main product lines relative to their com p etitors in term s o f cost, quality, and
c u sto m e r satisfaction. The response indicated that a high proportion o f the
respondents (4 1 .0 3 % ) perceive their firms to be in the top decile in their respective
industry. V irtually all believe that their organisation is in the top 50% o f their
industry.

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c. Types o f management accounting techniques currently used by Indonesian

companies

V arious m a n a g em e n t accounting techniques are taught in Indonesian

universities. Since m any o f these university graduates are e m ploy e d by the
co m p a n ie s represented in the study sample, it is reasonable to speculate that a
n u m b e r o f m anagerial tools and techniques studied at the university are used by
Indonesian co m pa nie s to help m anagers control operations, evaluate p erfo rm an ce
and m ake decisions. To develop a picture about m ana g e m en t accou ntin g techniques
currently used by Indonesian com panies and to learn about their perceived
effectiveness, a set o f questions was asked, fab le 1 sum m a rise s the research
findings.
[In sert T ab le 1 here]

M ost com p a nies use routine decision m aking tools (type A in table 1).
A lm ost all c o m p a n ies (> 9 7% ) use cash, revenue and expend iture budgets.
C o ntribution m argin analysis is also used by m ajority o f the respondents (92.31% ).
O th e r tech niques such as standard costs, variance analysis, and break even analysis
are also frequently used (ranging from 64.10% to 74.36% ). w hile specific costing
m e th od olog ies (such as j o b and process costing) and transfer pricing systems*
ap p e a r to be used by less than h a lf o f the respondents. In terms o f their effectiveness,
most respondents perceived that the tools they used are m oderate to very effective
(ranging from 3 to 5 in the scale).

In evaluating capital budgeting projects, most com pan ies used present value,
internal rate o f return, and payback period methods. It seem s that the accou ntin g rate
o f return m ethod is not as popular a method for evaluating project p erform ance. In
term s o f effectiveness, present value and internal rate o f return are perceived to be
m ore effective than payback period and accounting rate o f return m ethods.

The responding com p anies m ainly used net income c om bined with
expend iture budgets to evaluate m anagers' perform ance. Respondents co nsider these
bases for perform ance evaluation to be highly effective. Return on investm ent is only
used by less than 50% o f the respondents but is perceived as having a m od erate to
high level o f effectiveness by those that use it. The fact that return on investm ent is
not a very po pular m easure for evaluating m anagers' perform ance is understandable.
In Indonesia, m ost investm ent decisions are m ade at the highest level o f the
hierarchy and so m etim es by the owners. M anagers are more responsible for the
profit o f their business units or divisions. Therefore, m any business units, divisions,
or even c o m p a n ie s are considered as profit centres rather than investm ent centres.

I. All b u t o n e m a n u f a c t u r i n g c o m p a n y , h o w e v e r , u s e d job o r d e r c o s t in g , p r o c e s s c o s t i n g or
b o th . O n th e o t h e r h a n d , t w e l v e o f n i n e t e e n m a n u f a c t u r i n g c o m p a n i e s ( o r 6 3 . 1 6 % ) d id n o t u se
t r a n s f e r p r i c i n g s y s te m s .

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d. The role o f management accounting systems in management decision making

Traditionally, m a n a g e m e n t accou ntin g inform ation has been m ainly financial

in nature. Prim arily non-strategic, its focus has been on a d heren ce to standards,
feedb ack on budget variances and on departm ental or unit cost effectiveness.
Recently, how ever, m a n a g e m e n t acco un ting inform ation has incorporated
con sid erab le operational (n on-financial) inform ation such as quality, cycle tim e, and
cu s to m e r satisfaction and has begun focusing on inform ation that assists in the
rem oval o f non-valu e added activities and in the d ev e lo p m e n t o f m ore robust
pe rfo rm a n ce m e a su re m e n t system s.

M ost resp ond in g co m pa nie s (71.79 % ) have an identifiable m a n a g e m e n t

a c c ou ntin g g roup and this group provides inform ation to m an agers (as o pp osed to
being prim arily con cern ed with satisfying external reporting requirem ents). This
finding contradicts previous research that m a n a g e m en t accoun ting practices are
virtually non-existent in Indonesia (see for exa m p le A b d o e lk a d ir & Y unus, 1994). It
is also en c o u ra g in g to note that in 63.16%) o f the org an ization s sam pled, the
m a n a g e m e n t a c c ou ntin g group increased in size relative to other g roups within the
business.

To assess the nature o f m a n a g e m e n t acco unting system s used by Indonesian

co m p anies, respon dents w ere asked to evaluate their m a n a g e m e n t a c c oun ting
system s on a 5-point Likert scale with respect to the follow ing issues for the tw o
tim e fram es o f 1997 (current condition) and 2002 (expected condition):
1. W h ethe r m a n a g e m e n t accou ntin g system s in Indonesia focus prim arily on
dep artm ental or tin it level cost effectiveness (1 in scale) or overall
organizational level cost effectiveness (5 in scale).
2. W h e th e r m a n a g e m e n t accoun ting system s in Indonesia focus prim arily on
a c hie ving cost control (1 in scale) or co ntin uo us im p ro v e m e n t (5 in scale).
3. W hether m a n a g e m e n t acco unting system s in Indonesia focus prim arily on non-
strategic (1 in scale) or strategic cost m a n a g e m e n t issues (5 in scale).
4. W h e th e r m a n a g e m e n t a ccou ntin g system s in Indonesia provide m a in ly static
c o m p a riso n s and static view s o f costs and cycle time (1 in scale) or provide
inform ation on co m panies' key success factors (5 in scale).
5. W h e th er m a n a g e m e n t accou ntin g system s in Indonesia provide p rim arily financial
(1 in scale) or both financial and operational inform ation (5 in scale).

Table 2 show s the mean response to the live questions. In 1997, the mean
responses are around three which indicate that responding c o m p a n ies are prim arily
using traditional m a n a g e m e n t acco un ting systems. The mean responses for 2002,

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how ever, indicate that respondents are prepared, and expect, to ado pt m ore
innovative app ro a c he s to m a n a g e m e n t accounting system s (m ean >4).

[In sert T a b le 2 here]

It seem s that in this globalization era, Indonesian c o m p a n ie s are w illing to

adapt their m a n a g e m e n t accounting system s to w hat others in the world are doing.
Several reasons m ig ht account for this p henom ena. First, changes in m a n a g e m en t
a c c ou ntin g system s m ig ht be driven by a m im etic process in which c o m p a n ie s copy
w hat other successful o rganizations have been doing (D iM ag gio and Powell, 1983).
Second, adaptation m ight be caused by the fact that m any Indonesians are being
trained abroad w here they are exposed to new ideas. Third, m an y c o m p a n ie s are
being advised to adopt innovative m a n a g e m en t accoun ting system s by professional
groups such as Indonesian Institute o f A ccountants and I FAC.

e. The perceived role o f accountants in organizations

The role o f accountants in general, and m a n a g e m en t acco un tan ts in

particular, has been ch allenged by a c ad em icians and practitioners. Som e argue that
ac c o unta nts tend to w ork in their own dom ain and are not interested in innovation.
T able 3 show s the perceived role o f accountants in Indonesia in 1997 and how that
role is expected to change by the year 2002. Based on the mean responses, the
respon dents (recall that the respondents were “ M anagers o f Fin a n c e ” or e quivalent)
perceived that the role o f accountants is still so m e w ha t traditional. This role,
how ever, is expected to evolve to a broader set o f responsibilities in the next five
years. A gain, the results indicate that Indonesian c om pan ies are in line with other
c o m p a n ie s in the world. The traditional view o f acco un tan ts as record keepers is
expected to ch ang e in the future as accountants becom e an integral part o f the
business team.
[In sert T a b le 3 here]

f Improvement initiatives

The increased level o f international com petition has caused many

org anization s to im prove their products in term s o f quality, speed, and price to meet
c u sto m e rs ’ dem and. C om p an ie s often find that their existing system s c annot provide
inform ation needed in this ever changing environm ent. Fortunately, new innovations
in m a n a g e m e n t accoun ting m ethods are being developed with the ultim ate goal to
increase custom er's satisfaction.

The follow ing section describes the extent o f organizations' use o f

im p ro v e m e n t initiatives, prediction about their use in the next five years, and the

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level o f inv olvem en t o f m a n a g e m e n t acco un tan ts in w o rk in g with the p articular

initiative. R e spo nd ents w ere asked to indicate the intensity level on a 5-point Likert
scale (1: not intense; 5: highly intense).

Table 4 provides the mean response to the current level o f intensity o f

interest (1997), the prediction o f level o f intensity o f interest in the year 2002, and
invo lv em en t level o f acco un tants (or m a n a g e m e n t acco un tants) in these initiatives.
The level o f intensity in 1997 is m oderate. H owever, c om pa n ie s e xp ect that the
interest in, and use of, these new initiatives will be m uch m ore intense in the y ear
2002. A c c o u n ta n ts ’ involvem ent in these initiatives is only m oderate.

[In sert T ab le 4 here]

T hese findings send a clear signal about com panies' desire to im prove their
m a n a g e m e n t a c c ou ntin g systems. M a n a g e m e n t is being exposed to new initiatives to
increase c o m p etitiv eness o f their co m pa n ie s through new literature, sem inars,
train in g and w orksho ps available both dom estically or internationally. U nfortunately,
Indonesian a ccou ntants seem not yet involved intensively in the innovation process.
It appears that there is som e distance to travel before the perceived role o f the
a ccoun tant in the y ear 2002 (as described in Table 3) is reached.

4. P h a se 2 - H y p o th esis d ev elo p m en t

The purpose o f the second part o f this study is to add to the descriptive
findings by e x a m in in g w h ethe r there is any relationship betw een innovation in
m a n a g e m e n t accou ntin g system s in Indonesia and organizational characteristics.
Specifically, the study posits and tests the relationship betw een the d e p en de n t
variable, innovation in m a n a g e m e n t accou ntin g system s, and independent variables
o f hierarchy, organizational design, c o m p a n y perform ance ranking, organizational
size and age.

A review o f innovation adoption literature reveals that contextual variables

play an im portant role in exp laining the degree o f innovation in organizations (e.g.
A b ra h a m so n , 1991; G resov, 1989). In this literature, innovation is defined as tools,
devices, and kn ow led ge that constantly im prove operating processes from the level
previously achieved. Thus, com pany A is considered m ore innovative than c o m p a n y
B if com pan y A transform s equal inputs into greater outputs than does c o m p a n y B.

Innovative m a n a g e m e n t acco unting techn iq ues are those that better support
c o m p an ies' strategies to im prove custo m e r satisfaction in term s o f quality, speed, and
price o f their products or services. In contrast, traditional m a n a g e m e n t a c c o unting
techniqu es are defined as those that w ere designed to support c o m p a n y strategies to
produce m ore h o m o g e n e o u s products and services in stable technological
e n v iro n m e n ts (e.g., Johnson & Kaplan 1987). T hese techniqu es include standard

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cost, variance analysis, flexible budgets, j o b order costing, process costing, overhead
application and analysis, cash budget, production budget, and divisional perfo rm an c e
analysis. For the purpose o f this study, the level o f innovation in m a n a g em e n t
a c c o un ting system s is m easured by com panies' intensity levels in using the
c o n tem p o ra ry m a n a g e m e n t accounting system s listed in Table 4.

C o n tin g e n c y theory indicates that the adoption o f innovative m a n a g e m e n t

a c c o un ting techn iq ues m ay be driven by several factors, including technological
innovations, production techniques, e n vironm ental uncertainties, organizational
design, adm inistrativ e control strategies, and size o f organizations (Tiessen &
W aterhouse, 1981; Otley, 1981; Ghozali & Linnegar, 1996; W aterhou se & Libby,
1996; Tiesen & W aterhouse, 1983). W e use various surrogates o f these m easures to
test their link to innovation in m a n ag e m e n t accounting systems.

a. Level o f hierarchy

Recent technological innovation dem an ds m ore flexible app ro a ch e s to

production techn iq ues and work force m anag em en t. The introduction o f team -b ased
a pproaches, for exam ple, requires m ulti-skilled em ployees. As a result, organizations
that use innovative techniques tend to be flatter than those organ ization s that use
traditional techniques.

T here is a w idespread view that hierarchy is the antithesis o f initiative and

creativity. H ierarchical structure has been perceived as the source o f trouble and
inefficiency. Excessive layering has caused inefficiency and inflexibility because
inform ation passes through too m any people and decisions m ust go th rough too
m a n y levels (see for ex a m p le Jaques, 1990). Given this p h eno m en on , w e expect:

H I: O rganization s with fewer levels o f hierarchy tend to use

m ore innovative m a n a g e m e n t accounting system s than those with
m ore levels o f hierarchy."-

h. Organizational design

W ith increasing levels o f com petition, o rganizations are forced to respond

m ore q uickly to c u sto m e r needs. O rganizations that are oriented tow ard process are
m ore flexible in respo nd in g to custom ers' needs as com pared to those oriented
tow ard function. In a process oriented organization, w orkers are grouped based on
related functions to be perform ed. This condition provides a clim ate for mutual
support and learning as well as inter-departm ental multi-skill develo pm ent. The
ch aracteristics inherent in process oriented organizations are consistent with

2. For convenience, all hypotheses are stated in the alternative form.

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c o n tem p o ra ry m a n a g e m e n t accou ntin g system s such as T e a m -B a se d A pp roaches,

Total Q uality M a na g e m e nt, Em p lo yee E m p o w e rm e n t, and A ctiv ity-B ased
M a n ag e m e nt. Therefore, we predict:

H2: Process oriented organizations tend to use m ore innovative

m a n a g em e n t accou ntin g system s than those oriented tow ard
function.

c. Organization performance

M a n a g e m en t accoun ting system s play a crucial role in assisting m a na ge rs in

their planning and control activities. In light o f rapid and a ccelerating c h an ges in
production system s, m anu facturin g technology, and particularly the e n o rm o u s
innovation in inform ation processing technology, m a n a g e m e n t a c c o unting system s
need to respond appropriately by providing the relevant and tim ely inform ation
d e m a n d e d by today's m anagers. Although excellent m a n a g e m e n t a c c ou ntin g system s
m ay not guarantee organizations' success, ineffective m a n a g e m e n t a c c ou ntin g
system s w hich produce delayed, distorted, or too highly ag gregated inform ation can
easily put organizations at risk. Innovative m a n a g e m e n t a c co un ting sy stem s support
organizations' effort to becom e m ore com petitive through better quality, low er costs,
higher productivity, and better responsiveness to custom ers' dem and. Therefore, the
follow ing hypothesis is offered:

H3: G ood p erform ers tend to use m ore innovative m a n a g e m en t

a ccoun ting system s than poor performers.

d. Organization size

Prior studies have argued that organization size influences the level o f
innovation in m a n ag e m e n t acco un ting system s (e.g., G hozali & L innegar, 1996;
M erchant, 1984; Bruns & W aterhouse, 1975). L arger organ izatio ns need m ore
sophisticated system s to account for their operations. In addition, larger
organizatio ns tend to have more resources invested in innovation efforts. T herefore,
we posit that:

H4: Large organizations tend to use m ore innovative

m a n a g e m e n t acco un ting system s than small organizations.

e. Organization age

Som e em pirical studies have found that organizational age is positively

correlated with innovation (e.g., G hozali and Linnegar, 1996). T hey argue that older

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c o m p a n ie s have the o pp ortunity to establish them selves in the m arket w hich enables
them to spend their resources on innovation efforts. Thus, we posit that:

H5: O ld er organizations tend to use more innovative

m a n a g em e n t accounting system s than new er organizations.
5. Variable m e a su re m e n t

There are five variables used to test the hypotheses m entioned in the
previous section. The d ependent variable is innovation in m a n a g em e n t acco un ting
system s w hile the independent variables are hierarchy, organizational design,
perfo rm an ce, size, and age.

a. Innovation

The level o f innovation was m easured using the scales shown in Table 14.
The instrum ent has 17 items and responses were given on a 5-point L ikert-type scale
based on the principle o f sem antic differences described in O sgood et al. (1957) (e.g.,
l= n o t developed ; 5=highly developed). T herefore, the highest possible score is 85
and the lowest possible score is 17).

b. Hierarchy

H ierarchy is m easured by the n um ber o f layers from top m an a g e m e n t (C E O )

to the technicians and operators (see for exam ple Jaques, 1990). For analysis
purposes, respo nding firms are classified into two groups; flat and steep. An
organization is flat if it has a m ax im um o f five layers w hile a steep organization is
one with m ore than five levels o f hierarchy-5.

c. Organizational design

O rganizational design is classified into two categories: process oriented and

functionally oriented. (O rganizations that indicated they utilize both process and
function a pp ro aches to m an a g e m e n t were excluded from the analysis).

d. Performance

Perform an ce o f an organization is m easured by the ranking o f its principal

product(s) or service(s) in term s o f the key perform ance factors such as cost, tim e, or
quality in its respective industry. Respondents were asked to provide a self-ranking
o f their organization as com pared to their com petitors. Clearly, this self-ranking is

3. The dichotomy is determined following the empirical study by Jaques, (1990). The five
layers consist of the CEO, President, General Managers, Unit Managers, and Technicians and
Operators. More than five layers in an organization is therefore considered excessive.

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not necessarily w h at the real ranking would be if co nducted by an o bjective analyst.

H ow ever, it does provide a m easure o f relative perform ance. G oo d perfo rm ers w ere
classified as those w h o se self-rankings w ere in the top 30% w hile poor perform ers
w ere classified as those w hose rankings were below the top 30% .

e. Size

Follo w ing previous studies, organizational size is m easured by total assets.

O rga niz a tion s are categorized into three classes: small, m edium and large. For this
analysis, the total assets in each category were: less than $ 40 million, 4 0-200
m illion, and m ore than 200 million US dollars respectively.

f Age

This variable is m easured by the length o f period in o peration since

establishm ent. R espo nd ents were divided into two categories: new o rg anization s
(less than 10 years in operation) and established organizations (m ore than 10 years in
operation) organizations.

6. H y p o th esis testin g

A separate on e -w a y A N O V A test w as condu cted for each indepen dent

variable since we were interested in evaluatin g the differences in the level o f
innovation betw een g roups for each independent variable. In this design, A N O V A is
consid ered the m o st a ppropriate (see for e xam ple Bloom , 1992; H ow ell, 1992;
Evans, 1992).

a. Hypothesis one

The first hypothesis predicted that level o f hierarchy has a negative

association with innovation in m a n a g e m e n t accou ntin g system s. Table 5 sho w s the
results o f the statistical test. The results indicate a significant differen ce in the
innovation level in m a n a g e m e n t acco un ting system s b etw een flat and steep
org anizations, F( 1,36)=2.87, p<. 10. Flat organizations use m ore innovative
m anagem ent accou ntin g system s (m e a n = 5 5 .0 6 ) than steep organ izatio ns
(m e a n= 45.5 7). T he results is consistent with hypothesis H I.

[Insert T ab le 5 here]

b. Hypothesis two

The second hypothesis expected that organizations oriented tow ard process
w o uld use m ore innovative m a n a g e m e n t a c c oun ting sy stem s than those oriented

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tow ard function. T able 6 depicts the results o f the hypothesis testing. T he results
sho w a significant difference in innovation level betw een process oriented and
functional oriented o rganizations F (1 ,3 5 )= 7 .19, p<05. Process oriented
organ izatio ns are m ore innovative (m e an = 63 .38 ) than functional oriented
organ ization s (m ean = 47 .00 ). The results confirm hypothesis H2.

[In sert T a b le 6 here]

c. Hypothesis three

T he third hypothesis stated that good perform ers tend to use m ore innovative
m an a g e m e n t accou ntin g system s than poor performers. Table 7 show s the results o f
the statistical test. The results indicate a significant difference in innovation level
betw een good perform ers and poor perform ers, F( 1,30 )= 6 .4 1 , p<.05. C ontrary to
expectations, it is the poor perform ers that use m ore innovative techn iq ues
( m e a n = 6 0 .8 0 ) than good perform ers (m ean=44.95). The results are not consistent
with h ypothesis M3.

[In sert T a b le 7 here]

T he result is unexpected. In general, it is reasonable to predict a positive

correlation betw een innovation level o f m a n ag e m e n t accoun ting sy stem s and
organization perform ance. The contrary results raises som e questions about the
relationship betw een innovation and perform ance. Is it innovation that causes
perform a nc e or perfo rm ance expectations that create the need for organ izatio ns to
innovate? In Indonesia, for exam ple, we w itness that poor p erform ers are often
forced to undergo a restructuring program that includes new m a n a g e m e n t and new
m a n a g e m e n t m eth od s and system s to operate their business. Poor perfo rm a n c e could
be a trigger that forces Indonesian organizations to be innovative. H ow ever, it is also
true that innovative m a n a g e m e n t techniques are still in the early stages o f being
introduced to com p a nie s in Indonesia. An alternative explanation to the unexpected
results is the possibility o f a lagged variable effect w hich could not be tested in this
study. It is also possible that since a lm ost all firms in the sam ple rated their
perfo rm a n c e as above average, the perform ance variable is poorly specified.

d. Hypothesis fo u r and five

T he fourth and fifth hypotheses investigate the association betw een level o f
innovation and organizational size and age. Statistical analyses w ere p erfo rm ed on
these tw o hypotheses. The results show that there is no association betw een
innovation and size or age. The results, therefore, do not support hypotheses four and
five.

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7. C o n clu sio n

C o ntra ry to existin g beliefs, this study provides e vidence that m a n a g e m e n t

a c c o un ting is used as a tool for m anagerial efficiency and decision m a k in g in
Indonesia. M a n y c o m p a n ie s have an identifiable m a n a g e m e n t a c c o u n tin g g roup
w h o se prim ary purpose is to provide inform ation for m anagers' decision m aking.
This study also reveals that traditional m a n a g e m e n t acco un ting tools are being used
intensively by In donesian co m p anies. A doption o f new initiatives in m a n a g e m e n t
a c c o un ting ap p e a r to lag, but are expected to increase by the turn o f the century.

T he traditional view o f m a n ag e m e n t a ccou ntan ts as a g roup that provides

routine schedules and reports still dom inates. H ow ever, there is a b e lie f on the part o f
finance m a n a ge rs that m a n a g e m e n t accoun tants will play a m ore active role in the
future - one that fosters change and takes on broader responsibilities for the direction
and m a n a g e m e n t o f the organization.

A ltho ug h this study m ight be considered exploratory, the results are

consistent with tw o o f ou r con jectu res based on existing literature. T he level o f
m an a g e m e n t a c c ou ntin g system s innovation in org anization s can be predicted by the
level o f h ierarchy and the nature o f organizational design. Increased hierarchy has a
n egative association with innovation in m a n ag e m e n t acco unting system s. Similarly,
org anization s that are oriented tow ard process use m ore innovative m a n a g e m e n t
ac c o u n tin g sy stem s than functionally oriented organizations.

A co ntradictory result w as found w hen testing the association betw een

innovation in m a n a g e m e n t accounting system s and perform ance. W hile w e exp ect a
positive association, the opposite direction w as found. It m igh t be th at poor
perfo rm a n c e triggers the adoption o f m ore innovative m a n a g e m e n t a cc o un ting
system s or there m igh t be a lagged variable effect w hich could not be tested in this
study or the variable w as sim p ly misspecified. This is an interesting finding that
d eserves further research particularly in determ ining the causal relationship betw een
innovation and perform ance.

T he results o f the study m ust be tem pered by the k now le dg e that the
response rate o f 15% w as low and that the 39 c o m p a n ie s that participated in this
study are not a perfect representative o f all publicly held c o m p a n ie s in Indonesia.
N ev ertheless, given that hardly any inform ation about m a n a g e m e n t ac c o un ting
practices in Indonesia exist, this study m ay be considered as a first step in gaining an
appreciation o f the types o f m an a g e m e n t acco un ting sy stem s that currently exist in
Ind onesia and the degree to w hich these system s, and the m a n a g e m e n t a c countants,
w ho operate them , are expected to change o ver the next five years.

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50 M a n a g e m e n t A c c o u n t i n g in In d o n esia: A n a l y s i s of.

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Atkinson, A.A., J.H. Waterhouse and R.B. Wells, (1997), A Stakeholder Approach to
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Ghozali. I., & G.J. Linnegar, (1996), "The Effect of Firm Characteristics on the Application of
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Gresov. C., (1989), "Exploring Fit and Misfit with Multiple Contingencies", Administrative
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Jaques, Elliott, (1990), "In Praise of Hierarchy", Harvard Business Review, January-February,
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Jermias, Johnny, (2000), “Cognitive Dissonance and Resistance to Change: The Influence of
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Johnson, H.T., & R. Kaplan, (1987), Relevance Lost - The Rise and Fall of Management
Accounting, Boston, M.A., Harvard Business School Press.

Kaplan, R.S., & A.A. Atkinson, (1998), Advanced Management Accounting, Third Edition,
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Kelly, D., & T.L. Amburgey, (1991), "Organizational Inertia and Momentum: A Dynamic
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M anagem ent A ccou n tin g in Indonesia: A n alysis o f

Percentage
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 Table
Management Accounting Techniques Used By Indonesian Companies (%

M anagem ent Not Used Effectiveness

Accounting Used Low High
Techniques Employed

1 2 3 4 5

A. Routine Decision
Tools

The International Journal of Accounting and Business Society

1. Cash Budget 2.56 97.44 5.26 2.78 31.58 39.47 21.05
C'cnlrc Ibr Indonesian Accounting and Manaaement Research

2. Revenue Budget 2.56 97.44 2.78 5.26 13.16 47.37 31.58

3. Expenditure Budget 2.56 97.44 5.26 2.78 13.16 47.37 31.58

4. Standard Cost 35.90 64.10 0.00 16.00 32.00 32.00 20.00

5. Variance Analysis 25.64 74.36 0.00 6.90 31.03 41.38 20.69

6. Break-Even Analysis 30.77 69.23 3.70 18.52 37.04 25.93 14.81

7. Job Order Costing 53.84 46.15 0.00 11.11 22.22 50.00 16.67
Vol. 8. No. 1. August 2000

8. Process Costing 53.84 46.15 5.56 0.00 11.11 66.67 16.67

9. Contribution 7.69 92.31 2.78 2.78 22.22 50.00 22.22

Analysis

10.Transfer Pricing 56.41 43.59 0.00 17.65 41.18 35.29 5.88

53
 54
Management Accounting in Indonesia: Analysis of...
B. Project Evaluation

1. Present Value Model 17.95 82.05 6.25 9.38 9.38 59.38 15.63

2. Internal Rate of 15.38 84.62 6.06 6.06 21.21 42.42 24.24

Return
© Centre for Indonesian Accounting and Management Research

3. Payback Period 15.38 84.62 0.00 30.30 36.36 18.18 15.15

4. Accounting Rate of 43.59 56.41 0.00 27.27 36.36 31.82 4.55

Return

C. Performance
Evaluation

1. Return on 51.28 48.72 5.26 5.26 36.84 36.84 15.79

Investment

2. Net Income 17.95 82.05 3.13 6.25 21.88 31.25 37.5

Vol. 8. No. 1. August 2000

3. Expenditure Budget 15.38 84.62 0.00 6.06 36.36 36.36 21.21

 The In tern atio n al Jo u r n al o f A e c o u t i n g an d B u s i n e s s S o c i e t y 55

Table 2
Mean Response of the Nature of Management Accounting Systems

Mean (scale of 1 - 5)
Question

1997 2002
(current) (expected)

1. Unit vs. organizational effectiveness. 3.00 3.72

2. Cost control vs. continuous improvement 3.03 4.15

3. Non-strategic vs. strategic issues 3.18 4.23

4. Static vs. key success factors 3.23 4.13

5. Financial vs. operational results 3.18 4.18

Table 3
The Perceived Role of Accountants in Indonesia

Mean
Question

1997 2002

1. Deliver routine reports (1 in scale) vs. service to internal customers

for customer satisfaction (5 scale) 3.05 4.00

2. Inhibits or uninterested in change (1 in scale) vs. fosters change (5 3.05 4.18

in scale)

3. Isolated (1 in scale) vs. part of management team (5 in scale) 3.36 4.23

4. Exist to support financial accounting requirements (1 in scale) vs to

serve internal customers (5 in scale) 3.33 4.08

5. Provides structured facts about costs (1 in scale) vs. advice based

on potential cost behaviour (5 in scale) :>. 1j 4.03

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56 M a n a g e m e n t A c c o u n t i n g in Indonesia: A n a l y s i s o f

Table 4
Improvement Initiatives and Accountants' Involvement

Mean (scale of 1-5)

Intensity of Level o f Interest in
Improvement Initiatives

1997 2002 Level of

(current) (expected) Current
Involvement

1. Benchmarking 2.56 3.41 2.82

2. Total Quality Management 3.10 3.90 3.23

3. ISO (9000, 14000, etc) 3.18 3.97 3.08

4. Flexible Manufacturing 2.08 2.51 2.1-5

5. Customer Focus 3.49 4.08 2.97

6. Team-Based Approach 3.18 3.62 2.95

7. Activity-Based Costing 2.57 3.54 3.51

8. Activity-Based Management 2.49 3.41 3.15

9. Social Responsibility 3.08 3.67 2.72

10. Employee Empowerment 3.18 3.77 3.00

11. Target Costing 2.87 3.28 3.44

12. Computer Integrated 2.74 3.67 3.41

Manufacturing

13. Just-in-time 2.26 3.15 2.85

14. Non-financial Performance 3.00 3.56 2.85

Measurement

15. Business Process 2.72 3.56 3.03

Reengineering

16. Value-chain Analysis 2.18 2.64 2.41

17. Economic Value Added 2.54 3.26 2.97

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T able 5
O n e - w a y A N O V A re su lt: I n n o v a t i o n w i t h h i e r a r c h y

Source SS IMS F-ratio F -prob.

B etw een G ro u p s 1 8 1 8 .0 3 818.03 2.87 .0 9

W ithin G ro u p s 35 9 ,9 7 2 .0 8 284.92

T o ta l 36 10.790.1 1

Table 6

O n e - w a y A N O V A result: I n n o v a t i o n w ith o r g a n i z a t i o n a l d e s i g n

Source SS MS F - r a tio F-prob.

DF

B etw een G ro u p s 1 1 ,6 6 8 .4 3 1 ,6 6 8 .4 3 7 .1 9 .01

W it h i n G r o u p s 34 7 .8 8 5 .8 8 231.94

T o ta l 35 9 ,5 5 4 .3 1

T able 7
O n e - w a y A N O V A re su lt: I n n o v a t i o n w i t h p e r f o r m a n c e

Source SS MS F -r a t io F-prob.
DF

B etw een G ro u p s 1 1 ,7 2 6 .1 6 1 ,7 2 6 .1 6 6.41 .02

W ith in G ro u p s 30 8 , 0 8 0 .5 5 269.35

T o ta l 31 9,806.72

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