JMAR

Volume Three
Fall 1991

Restoring the Relevance of

Management Accounting
Toshiro Hiromoto
Hitotsubashi University

Abstract: In our internationally competitive business environment, the path to

take to restore the relevance of management accounting is sought by many.
This article is based on the author's intensive field studies at successful Japa-
nese manufacturing firms in several major industries, including automobiles,
semiconductors, and consumer electronics. Four case descriptions are included.
Today's innovative management accounting systems are designed to support
continuous innovation, which is a new common theme of management accounting
systems design. The four elements of the new theme are: A Behavior Influenc-
ing Focus, Market-Driven Management and A Dynamic and Team-Oriented
Approach. In the past, management accounting has tended to focus on optimi-
zation with respect to a given set of parameters. Today's manufacturers, how-
ever, need a new system that would promote strategic management and focus
on motivating employees to act strategically.

We are now In a period of Innovation. A global innovation race is on.

Innovation existed and was important in other ages as well, but what is
being seen today is "continuous innovation,"^ and in our internationally
competitive environment, corporate excellence depends a great deal on
whether the process of innovation can be effectively managed. As a result,
yesterday's management accounting has lost relevance. The management
accounting being performed by top Japanese manufacturers today shows
a new common focus or theme that represents a departure from what was
observed in the past. They are showing us a path to take to restore the

'Continuous Innovation Is close to "kaizen" as described by Imal 11986]. Both are incremental
or evolutionary processes, not revolutionary. And both are customer oriented. However, the
Japanese term "kaizen" implies that focus is on the factory activities. Continuous innovation
is applied to all corporate activities.

/ am indebted to Professor William L. Ferrara (Stetson University) for his helpjid

suggestions and comtnents. I also wish to thank Professor Emeritus Robert AT. Anthony
(Harvard University). Professors Charles T. Horngren (Stanford University), H. Thomas
Johnson (Portland State University), Robert S. Kaplan (Harvard University), Kenneth
A. Merchant (University of Southern California). Frances Moss (The Polytechnic of
Central London) and Kiyoshi Okamoto (Hitotsubashi University), and Professor
Emeritus David Solomons (University ofPennsylvania) for many editorial and thought-
fid comments on earlier versions of this article. I also acknowledge the encouragement
of Professors Jonathan B. Schiff (Fairleigh Dickinson University) and John K, Shank
(DartmouthCollege). The usual caveat applies that they are not responsible in any way
for remaining errors, inconsistencies, omissions, or faulty interpretations.
2 Journal of Management Accounting Research, Fall 1991

relevance of management accounting. Their management accounting sys-

tems reinforce a top-to-bottom commitment to process and product Inno-
vation.
In today's rapidly changing business environment, innovation is the
key to a company's survival and competitiveness, and the strategies that
determine the direction of that Innovation have become crucial to corporate
management. In Japan, management accountants work hard to link their
management accounting systems to their companies' strategies for inno-
vation. Faced with the need to simultaneously realize low cost, high qual-
ity, and timely delivery, they have been attempting more frequent use of
nonfinancial measures. Cost allocation systems have been modified to
promote automating factories, standardizing parts, and shortening lead
time. And management accounting systems are also being redesigned so
as to function better in an environment of restructuring and globalization.
Moreover, given the Importance of managing customer preferences, market*
driven management systems are also being designed. All these innovations
center around a single theme: the design of measurement and control sys-
tems for continuous innovation.
This paper will look at the relevance of this new theme and four elements
within it, following which will be some examples of innovative practices
that have developed from it.

A REEXAMINATION OF THE PURPOSE AND ROLE OF

MANAGEMENT ACCOUNTING
In order to restore the relevance of management accounting, some
changes are needed. The aim of this section is not to oversimplify traditional
management accounting and try to bash it entirely. Rather I do believe
most of the basic concepts of traditional management accounting are still
relevant and sound. I would likejust to suggest that some perspectives of
traditional accounting should be worth rethinking, e.g..
1. Management accounting should play an "information for decision-
making" role.
2. Management accounting should help obtain the optimal activities
with regard to the current conditions.
Overemphasis on "Information for Decision-Making" Role
Management accounting has had not only a decision-making but also
a behavioral focus. As Ferrara [19901 indicated, accounting research of a
behavioral nature has long been observed in U.S. literature. Anthony [1957]
and Bedford 11957] described a behavioral focus as early as 1957. SchlfT
and Lewin 11968] were also cognizant of behavioral factors. Horngren also
has increasingly emphasized the motivational effects of the choices of ac-
counting systems since the 1970s [Horngren. 19891.
However, it is a fact that there has been an overemphasis on a decision-
making focus. As Horngren [1989. p. 23] noted, motivation was mentioned.
but the emphasis was on which accounting quantifications would lead to-
ward wiser economic decisions. Research tended to focus on accounting
data for management decision making [Horngren. p. 22; Johnson and
Hiromoto

Kaplan, 1987, p. 162]. That accounting Is a system for providing Informa-

tion useful for economic decisions has been the widespread view, and it
still is. In fact, some are going so far as to say that western management
accountants "are brought up to believe that numbers must above all be
.right to enable managers to make informed decisions" [Financial Times of
London. 11/18/881. They want to provide information as inputs to deci-
sion-theoretical models and give correct answers and optimal solutions.
They would stress the relevance and accuracy of accounting ilgures and
pursue the conditional truth, trying to build an accounting system that
permits measures and analyses of costs in relation to a particular deci-
sion.
Overemphasis on Constrained Optimization
Kaplan 11983] pointed out that management accountants normally
assumed a stable corporate environmient when considering a company's
cost or managerial accounting system. Johnson [1990] discussed the shift
in management accounting thinking from "taking constraints as given" to
"moving constraints."
The basic managerial problem apparently assumed by conventional
companies was to accept the current production environment as a given
and implement policies that are optimal with respect to these existing
conditions. In this kind of situation, cost accounting could contribute to
management appropriately by following the consumption of resources
precisely and computing the optimal policy with respect to a given set of
parameters.
Scientific management also assumed known characteristics and a stable
technology, as when manufacturers mass-produced and marketed mature
standard products. The most prominent single element in scientific man-
agement was the task idea. It consisted very largely in preparing for and
carrying out tasks based on engineering design, bills of material and time-
and-motion study. Employees were expected just to succeed in doing their
individual tasks right so that waste of material and time was kept to a
minimum. Factory workers were considered to be Just workers and opera-
tors, almost as attachments to machinery.
During the 1950s and '60s, a time when most of the world's industrial
powers were rebuilding from the devastation of World War II. America en-
joyed its Golden Age. U.S. manufacturers dominated their markets, con-
trolling the major technologies in their products and processes. Moreover,
they expected little change in the demands of their customers. As Prahalad
and Hamel 11990] noted, a diversified firm could simply point its business
units at particular products and admonish them to become world leaders.
THE ELEMENTS OF THE NEW THEME
Modern corporations are now operating in a totally different environ-
ment where static optimization is often irrelevant. Technological progress
has become a matter of days and months in this age of continuous inno-
vation. Such tremendous changes as more intense intemational competi-
tion, diversification of customer needs, shorter product life-cycles, and au-
tomation of factories are pervasive. Many firms' competitiveness does not
4 Journal of Management Accounting Research, Fall 1991

derive from the price/performance attributes of existing products. Instead,

competitiveness derives from an ability to build new quality products at
lower cost and more timely than competitors. Firms that wish to be world-
class manufacturers must produce goods of substantially higher quality
with greatly reduced inventory levels, shorter set-up times and production
runs, and less uncertainty in the overall production process than presently
exists. Rather than constrained optimization, the mission of today's man-
agement accounting is to assist continuous innovation and the creation of
a competitive tomorrow.
All employees, including factory workers, are now required to "think
while they work." A priority of management is to bring employees together
in the promotion of innovative activities. Today's management accounting
must build a constant awareness of strategic messages In every nook and
cranny of the company, assuring that employees will be involved in unified.
innovative activities and thus facilitating the enactment of corporate strat-
egies. The following elements together constitute the new theme of man-
agement accounting:
1. A behavior influencing focus (linking org£uiizational strategies to
action)
2. Market-driven management
3. A dynamic approach
4. A team-oriented approach
From Information for Decisions to A Behavior Influencing Focus
Accounting information is losing its prominence as data input for de-
cision making in the age of innovation and strategies. The relevance of
accounting information for decisions or choosing among alternative courses
of action is declining. While managerial decisions always require a variety
of input data of which accounting numbers are only a part, inputs to de-
cisions other than accounting information are becoming more and more
important. Moreover, management is less concerned with using information
as a power base than encouraging interdepartmental brainstorming and
communication.
At this point, management accountants need to change their focus in
designing their systems from an information-for-decisions to a behavior-
influencing focus.^ The information-for-decisions approach was apparently
stressed because management accountants wanted to recommend the
optimal decision, even though the final choice always rested with the op-
erating managers.
The primary concern of the behavior-influencing approach is to design
a system to influence employees to do the desired things. This system does
not necessarily try to provide a true and accurate cost and an optimal
solution, but allows employees to be creative and resourceful. For instance,
discounted cash flow models could be used to help focus, identify and
analyze critical input assumptions or project assumptions including pos-
sible scenarios and management responses and risks, rather than to solely

The info rmation-for-dedsions approach Is close to what IJlrl (1975) calls the decision
approach, although he contrasts It with the accountability approach.
Hiromoto

assist managers' choices, as described In Hodder [19861. A CAM-I CMS

project study group [From the Editors, p. 31. which visited some Japanese
manufacturing firms in November 1986. reported that Japanese manage-
ment accounting was usually less complex and less sophisticated, including
the investment justification procedure. The reason why Japanese practice
is often simple can be explained by the widespread emphasis on consensus
.decision making in Japan. That is. "the consensus formation process usually
entails discussions among a number of managers from different areas and
levels within the firm. In analyzing a project, such discussions tend to
include a considerable amount of ... verbal scenario analysis" (Hodder. p.
19]. For satisfactory participation in this process, managers must under-
stand the analytical details, but that does not mean that the accounting
must become detailed and complex.

Integrating the Behavior Influencing Focus with Strategies

In the age of innovation, strategies give the direction of the innovation.
As Anthony 11988. p. 10] states, strategies are guidelines for deciding the
appropriate actions for attaining the organization's goals. They may be a
vision of what and where you want to be, and may be the scenario of the
activities that will lead to that vision.
Today's good and innovative management accounting systems are be-
ing used to encourage employees to behave in accordance with the
organization's strategies. The systems are used to motivate employees to
think and act strategically and to implement a chosen strategy.
Company A. for example, which will be described later, illustrates the
case where a cost allocation system is used to implement a policy of parts
standardization. Manufacturer A faced a situation where it had to imple-
ment a cost reduction strategy in an environment of product diversifica-
tion. The manufacturer identified the number of part numbers as its key
cost driver or strategic behavioral cost driver in order to better implement
the chosen scenario: standardizing and reducing parts -> simplifying the
manufacturing process -* decreasing manufacturing costs. The parts stan-
dardization was the focal point for implementing the cost reduction strat-
egy in the environment of product diversification. (After this strategy was
successfully in place, a different strategic need brought forth a different
allocation scheme in Example B.)
From Technology-Driven to Market-Driven Management Systems
At this point, it is advisable to think of a firm as an interface between a
technology and its market, leaving out other elements that have effects on
corporate activity, such as culture, social practices, legal institutions and
education systems. Business activities should be undertaken in harmony
with both technological conditions and market needs.
In the tough economic situation after World War II. however, it was
extremely difficult, virtually Impossible, for Japanese manufacturers to sur-
vive and grow by operating at the optimal level computed taking the cur-
rent marketing and technological conditions as given, as American compa-
nies did. In industries such as automobiles and consumer electronics, some
companies began to look at the market first and follow a market-driven
6 Journal of Management Accounting Research, Fall 1991

strategy and as a result finally gained international competitiveness. Many

other companies in Japan have learned from those experiences, and have
adopted market-driven rather than technology-driven practices especially
during critical times like oil crises and skyrocketing appreciation of the
yen.
The practice followed by Japanese manufacturers is what I would call
market-driven^ management as contrasted with technology-driven man-
agement. It is a way of management thinking that gives priority to market
or customer requirements over technological limitations. Above all things.
attention should be paid to market trends and to what customers want
and need.
With a market-driven philosophy, management tries to break the cur-
rent technological limitations that restrict business activities, to satisfy
market and customer needs. It stresses the continual improvement of tech-
nology rather than the optimal behavior under current technological con-
ditions.
Now in the age of continuous innovation, even the U.S. manufacturers
can no longer produce and market large volumes of standard products
with a relatively stable market and technological environment. There has
been a shift from a manufacturing environment where markets and tech-
nologies were stable to one where markets and technologies are unstable
and change quickly. To implement market-driven management across the
organization, top management repeatedly and emphatically should tell
employees to stay close to their customers. And they must make structural
changes in the organization to accomplish this goal. Those actions are not
enough, however. Measurement and control systems must be designed to
motivate market-driven behavior. These systems are in essence not push
systems, but pull systems, as illustrated by Figure 1 where the market
rather than technology drives performance goals.

Market-Driven Cost Management Systems

Management accounting for motivating market-driven behavior that is
most typically conducted at Japanese companies is based upon target cost-
ing at the pre-production (or development and design) and production
stages. Target cost systems at the development and design stage are often
called genka kikaku. Under the target cost system, activities are controlled
by using a target or a market-based allowable cost that has to be realized if
the company Is to be profitable in the competitive market, and comparing
it with the actual or actually expected cost.
From Static to Dynamic Approaches
Management accountants have traditionally used the static approach
to designing and using their management accounting systems. Emphasis
was on performance for the individual time period, which is analogous to
focus on improved efficiency in each department.
Today's management accounting systems must be dynamic. Perfor-
mance has to be judged over time without emphasis on individual time
periods. Because innovation is a learning process, good management ac-
counting today should help the organization to leam by stressing the
progress of performance over time.
^Market driven or oriented is not maiketing oriented. See Shapiro (19881.
Hiromoto

Figure 1
Market-Driven vs. Technology-Driven
Cost Management Systems

TECHNOLOGY-DRIVEN SYSTEM

RESOURCES PRODUCTS

TECHNOLOGY
STANDARD
COST

MARKET-DRIVEN SYSTEM

RESOURCES PRODUCTS

TECHNOLOGY GOAL OF PERFORMANCE

TARGET
or ALLOWABLE
COST
8 Journal of Management Accounting ResearcK Fall 1991

Okamoto [19891 and Hall et al. |199l] observed measuring trends in

actual performance. Hiromoto [1988] described the use of moving goals of
perfonnance. Moreover, my field study observations have revealed that one
ofthe car manufacturers In Japan that installed the genka kikaku process
carried out the decomposition of target (allowable) cost per car dynamically.
That Is, at earlier stages of development and design, the company assigned
the target cost only roughly by sections such as engine design and chassis
design. Then it started comparing the targets and actual results by each
design group. Finally, targets were assigned for each part and for each
parts manufacturer.

From Baton-Passing to Team-Oriented Approaches

Specialization of function, which is a heritage of F. W. Taylor, is surely
necessary, but within reason. Today's corporations have been
overspecialized. Excessive specialization has led to a situation where in-
dependent activities "pass the baton" to get the job done [Cole. 1988].
Many authorities, including Clark [1989]. Kanter [ 1989]. and Okamoto
[1989]. have come to notice the disadvantages ofthe baton-passing or se-
quential approach and argued for the team-oriented approach to produc-
tion process and product development.
A team-oriented approach requires that management accountants
should facilitate bringing together all knowledge and experience in the or-
ganization. For example, the signiilcance ofthe use of nonilnanclal measures
to evaluate factory performance has been widely recognized. Notable here
is that such measures should be used in combination with improvement
programs implemented through small-group activities. In a lai^ge Japanese
company, the controller assumes the responsibility of promoting such ac-
tivities. The foolishness of baton passing is illustrated by a labor variance
defined at the individual production cell level creating incentives for workers
in each production cell to Ignore the effect of their actions on other pro-
duction cells [Foster and Horngren, p. 231.
The team-oriented approach requires that management accountants
are always thinking of how they can contribute to solving management
problems. A management accountant should be a member of the manage-
ment team through close communication with all the people In the organi-
zation. Concerning this point. Ferrara [1987. p. 20] provides a succinct
description: 'The management accountant does not live in a cloistered
environment surrounded by books and reports and securing knowledge of
the organization from the paperwork which crosses his or her desk. E^^en if
the accountant has theoretical training or even actual experience In all
phases of operations, close contact must be maintained with all staff and
operating units...." Accounting is a human activity, often entailing some
delicate interpersonal communication.
Actually, however, the professional tends to be overspecialized."* Johnson
and Kaplan [19881 observed that the design of accounting systems was
*Goetz|1939. p. 1521. who had learned much from J. O. McKlnsey, the author of Managerial
Accounting (The University cf Chicago Press, 1924). pointed out: "Accounting texts have been
the product of public accountants or of teachers trained by public aceountants.... Hardly
believable, but demonstrably true, this [public accounting] point of view has so permeated the
profession and the literature that private accountants and cost aecountants are also forgetful
ofthe managerial function of accounting."
Hiromoto 9

often the province of accountants who had Httle knowledge about their
firm's markets and technologies. Now is the time to change. A management
accountant as a member of the team is neither the distant evaluator of
perfonnance nor the gatekeeper of the organization's financial resources.

Some Examples
Example A
Factory A deals with almost a dozen product categories, including
packaged air conditioners (its major product), chiller units, fan coils, and
freezers. Each product category includes various models and types that.
taken together, number about 3.000.
In the late 1970s. Factory A noticed that demand was growing for a
wider variety of products. It produced 466 different items in 1977; this
increased to 518 in 1978 and 580 in 1979. It was obvious that product
diversification made manufacturing processes extremely complicated and
caused ballooned indirect manufacturing costs. Managers of the factory
faced the problem of promoting diversification while preventing cost in-
creases. After consideration, they concluded that diversification increased
the number of parts used and thus made the production process compli-
cated. At the same time, they paid attention to standardization, which was
so important a theme for the company that it held company meetings on
standardization. As a result, the reduction and standardization of parts
used became an immediate manufacturing strategy for the factory.
Then, they looked into the next problem, determining the appropriate
measurement system for implementing the strategy. As discussed In the
section on "team-oriented approaches." management accountants of the
factory were always thinking of how they could contribute to solving
management problems.
The question was raised about how product designers could be moti-
vated to cut the number of parts and work toward use of standard parts.
The company's product designers were expected to work with the Idea
that their department was a profit-making part ofthe company. Therefore,
they worked on designs to give the products better function at lower cost.
After discussion, management arrived at an agreement: to find a method
to allocate manufacturing overhead so that product costs increase with
the number of parts used and with the number of non-standard parts used.
As described below, design and testing costs were allocated to products
according to a new method called "standardization-based allocation." which
was set up to motivate the new strategy. The people concerned agreed that
there was a cause-and-effect relationship between design and testing costs
and the number and commonality of parts used.
Under the standardization-based allocation system, design and testing
costs were first allocated to each product category based on the number of
the employees engaged in the category. Then, the total weighted number of
parts used (TWN) was computed by product category using this formula:^
*rhe weighted values. 10, 5. and 1 were derived from an engineering study so that people would
acceptthemasfalr. Thesefiguresmay be Inexact, but not capricious [Anthony. 1983, pp. 126-
7\. The reader may imagine Intense arguments about whether it should be 10, 9, or 8, rather
than an understanding of the purpose ofthe calculation. Note that the purpose is to calculate
an Influencing cost instead of the "true" cost.
10 Journal of Management Accounting Research, Fall 1991

TWN = Z,(NixWNi)
= I,{Nix(UPix 10 + CPAix5 + CPBix 1)}
where,
Nl =
production quantity of model i
WNi =
weighted number of parts used in model i
UPi =
number of unique parts used in model 1
CPAl =
number of common parts among products In the same
category used in model i
CPBi = number of common parts among products in different
categories used in model i
Suppose a model in product category X uses 100 parts. Thirty of them
are unique, 50 are shared with other models In X, and 20 are common
parts also used In other models in different categories from X. Then, WN is
570 for the product.
The budgeted burden rate was obtained by dividing budgeted design
and testing costs by TWN for each product category, and revised every six
months. The costs were allocated to individual products at the charge rate
multiplied by WN.
The new system had a substantial effect. When I asked about improve-
ment, they gave me the following measures. They obviously stressed the
progress of performance over time. The standardization rate (number of
common parts / number of total parts) for all products was 60.5 percent in
the first half of 1978. grew to 62.2 percent In the second half, and to 63.8
percent in the first half of 1979. The same figure for newly developed
products was 11 percent in the first half and 20 percent in the second half
of 1978. rising to 22 percent in the first half of 1979. The rate Increased
steadily despite increasing product variety, and reached almost 68 percent
as of the second half of 1987 for all products.
I
Example B
The above-mentioned factory. Factory A. faced a new problem in the
late 1980s in the form of a substantial change In the market for the factory's
major product, packaged air conditioners. The market for 1.5 to 3.0 hp air
conditioners began to grow rapidly and was recognized as promising. It
became strategically important to invest as many resources as possible In
that particular product group. The problem facing the factory was that 5
hp and 2 hp air conditioners used the same number of parts, but the ratio
of retail prices was 100 to 60 or 70. Since the standardization-based allo-
cation system allocated the same costs to the two products. It determined
that the 2 hp product, which the factory should have been emphasizing,
was less profitable. WhUe it became necessary to encourage designers to
work on this type of product much more than before, the allocation ^stem
of Example A became a big obstacle to the strategy.
On the other hand, the designers had learned the value of common
parts so that they now naturally design products with common parts.
Moreover, computer-aided design had been introduced during the last few
years, which promoted the use of standard parts.
As a result. Factory A decided to abolish its standardization-based cost
allocation system and introduce a new system starting from October 1988.
Hiromoto 11

Under the new system, design and testing costs were first allocated (as
before) to each product category based on the number of employees, and
then allocated to each model in a category based on sales expressed In
yen.^ This encouraged the designers to be much more Interested In the 2
hp product because the 2 hp product became more profitable under this
method.
Example C
Factory C introduced a flexible manufacturing system (FMS) into a
manufacturing department in 1984, based on the strategic judgment that
as far as possible, in-company production of parts was preferable for cost
reduction, improved quality, and shortening the delivery time as well as
secure employment. However, it was not easy. Because the reported con-
version cost ofthe newly-established FMS department was almost twice as
high as that of outside manufacturers, it was more economical to order
from outside manufacturers.
The problem faced by Factory C was that if decisions were made using
available cost information, then the long-term manufacturing strategy for
internal production by FMS could not be realized. Various alternative
measures of product cost were examined. Including the proposal to count
the variable costs only or count only direct costs. However, agreement could
not be reached about this sort of partial costing. For senior management,
product cost had to be total absorption cost. The result was It seemed
impossible to carry out an internal production strategy while maintaining
total absorption costing.
Managers ofthe factory succeeded in solving the problem by changing
their way of thinking. The business environment was becoming increasingly
competitive internationally due to such factors as the advancement of newly
industrialized economies and technological irmovation had also accelerated.
To survive in such a competitive environment, what needed to be asked
was not "whether our current activities were economical" but "what to do
In order to cany out economical activities tomorrow." If the current tech-
nological level was not economically viable, then technological innovations
were required to make it economically viable. Accordingly, management
accountants ofthe factory changed their focus in designing their cost system
from an information-for-decisions to a behavior-influencing focus.
As a result. Factory C came up with an innovative cost accounting
system in 1988. The factory revised its method of charging conversion costs
to the product. Under the new system, the conversion cost charged to each
product or job order was not based on its own currently accrued cost, but
based on the cost arising from outside manufacturers, as illustrated below.
Notable was that internal conversion costs charged were made equivalent
to outside manufacturing cost.
For example, suppose the company has some work that takes 120 hours
for outside suppliers to process, but only 100 hours for the company thanCks
to the FMS. The outside order charge is $25 per hour, while the conversion

in yen and the number of employees are often used allocation bases, since they are
considered equitable. Hiromoto (1990, p. 18] Illustrates an example of how Influencing
strategies can be incorporated In the aJlocaUon process on the basis of sales.
12 Journal of Management Accounting ResearcK Fall 1991

cost is $50 per hour Assuming the company does 24 hours of external
work in 20 hours and contracts 96 hours outside of the 120 total hours.
the product costs for in-house and outside work are calculated as follows
according to the new system:
Outside order
materials cost $2,000
cost of outside work $25 X 120 hrs 3.000
total 5,000
In-house processing
materials $2,000
cost of outside work $25 X 96 hrs 2,400
conversion cost $30* X 20 hrs 600
total 5.000
•E>qulvalent value of In-house processing or $25 (120 hours/100 hours) =$30 per hour.

The above can be compared to the old system which is as follows:

Outside order
materials $2,000
cost of outside work $25 x 120 hrs 3.000
total 5,000
In-house processing
materials $2,000
cost of outside work $25 X 96 hrs 2.400
conversion cost $50 X 20 hrs 1.000
total 5.400
The calculated product cost was no longer higher when done in-house
than outside ($5,000 in both cases). Since the difference between the actual
conversion cost and the charged cost ($ 1.000 - 600 or $400) was determined
and highlighted as a significant variable, people were motivated to make
all efforts to reduce that difference so that they could become competitive
manufacturers. Note that the new system, which is in essence a f'orm of
target costing, permits the manufacturing strategy for internal production
without breaking the company's cost recovery policy and leads to the long-
term competitiveness of the company whose managers are no longer con-
cerned about obtaining the optimal activities with regard to the current
conditions.
Example D
Factory D was operating near full capacity in an extremely competitive
situation. But it was not making satisfactory profits. Managers tried various
methods to improve performance. They measured actual and standard
processing hours by process more often than before and analyzed the
standard-cost variances more closely. Nonetheless, they could not get
satisfactory results. They began to think about whether there was some-
thing wrong with their way of thinking.
Soon thereafter, the managers of Factory D turned to the new ideas of
just-in-time and optimized production technology characterized by pro-
Hiromoto 13

ducing products as needed and cutting lead time. They began to understand
that improved efficiency in each division did not necessarily add up to greater
efficiency for the factory as a whole. They knew they had wrongly believed
that everything was fine If only high capacity utilization was secured.
Management started a change by explaining its new manufacturing
strategy to all the people in the organization. Putting a strategy into prac-
tice required the cooperation of people in all departments.
Unfortunately, the sales department had always anticipated future
possible orders and included them as well as actual orders in their infor-
mation system because they feared delays in deliveries to customers. This
practice obviously went against the new strategy of producing the actually
required product in the required quantity. The thinking and action of the
sales people had to be changed. As a starter the input code for "anticipated
sales" in the sales department computer was eliminated.
In 1984, Factory D added two new performance measures, lead time
and inventory turnover, and gave priority to them. In addition, it decided
not to report actual processing time by division, even though modem com-
puterization of factory operations drastically reduced the cost of detailed
measurement of actual processing time. Efficiency in each division did not
necessarily lead to efficiency of the whole. Reporting the actual processing
time of each division encouraged actions focused on the efficiency of the
division at the cost of efficiency for the overall operation, and discouraged
necessary cooperation among divisions and employees.
A remarkable improvement in performance was made. Turnover days
were reduced from 102 days in 1985 to 30 days in 1988. Production lead
time was reduced from 108 days in 1984 to 52 days in 1988.
Allocated manufacturing overhead used to be calculated by multiplying
the predetermined division rate by the actual processing time. But, since
divisional actual time became unavailable, it was replaced by the division
standard time, which was the sum of each work station's standard pro-
cessing time.
At this point, the cost allocation system was not yet totally linked to
the factory's new production strategy. In 1989. however, the new cost al-
location system was devised and introduced. Under the new system, allo-
cated costs were calculated by multiplying the division rate by the total
standard "elapsed time" of the divisions.
The new system worked as follows. Assume three work stations. A. B,
and C. The standard processing time of each work station Is. respectively.
2 minutes. 10 minutes and 3 minutes. Then, the total standard elapsed
time was computed to be 10 x 3. or 30 minutes, while the total division
standard time is 15 minutes. The factory reported that the new cost system
began to influence employees' behavior so that cost reduction activities
were concentrated on bottleneck or constraining work stations.

CONCLUDING REMARKS
The business environment is not entirely chaotic, and at the same time
it is not entirely definitive. Business activities are carried out in a mixture
of optimization and innovation. However, yesterday's management ac-
counting lost Its balance. Yesterday's management accounting overem-
14 Joumal of Management Accounting Research. Fall 1991

phaslzed supporting static optimization and helping managers plan and

control optimal behavior. The questions to be asked now are "For what
purpose does management accounting exist today?" and "Which role should
management accounting emphasize today, 'information for decisions' or
'behavior influencing'?"
In the old, stable business environment, the keys to competitiveness
were the good machines and good decisions concerning their use. The key
resource to becoming an excellent company was material, and therefore
the primary concern of management accountants was to see that materials
and existing plant and equipment was used in an optimal manner and
that the employees worked in a way that those facilities were operated
most efficiently. Thus, management accounting used to be recognized as
"accounting to facilitate a superior's optimal decisions." However, today
when continuous innovation is the source of global competitiveness, the
key resource to manufacturing excellence is creative people. Here, man-
agement accounting should be recognized as "accounting for getting people
to do the desired jobs well."
Management accounting for continuous innovation presupposes an
awareness of the fact that the employees of the organization are the ultimate
source of improvements in quality and productivity. Its success depends
on the quality and ability of employees. Top management must recognize
this and utilize the management accounting system to motivate all em-
ployees to move toward the strategies developed and endorsed by top
management. Thus, the most basic element of today's management ac-
counting must be a behavioral focus.

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