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Activity-based Costing
During the 1980’s the limitations of traditional product costing systems began to be widely publicised. These systems were designed decades ago when most companies manufactured a narrow range of products, and direct labour and materials were the dominant factory costs. Overhead costs were relatively small, and the distortions arising from inappropriate overhead allocations were not significant. Information processing costs were high, and it was therefore difficult to justify more sophisticated overhead allocation methods (Sharma, 2000).
Today companies produce a wide range of products, direct labour represents only a small fraction of total costs, and overhead costs are of considerable importance.
Simplistic overhead allocations using a declining direct labour base cannot be justified, particularly when information-processing costs are no longer a barrier to introducing more sophisticated cost systems. Furthermore, the current intense global competition has made the decision errors due to poor cost information more probable and more costly. Over the years the increased opportunity cost of having poor cost information, and the decreased cost of operating more sophisticated cost systems, increased the demand for more accurate product costs (Holzer and Norrelklit, 1991).
It is against this background that activity-based costing (ABC) has emerged. ABC, however, is not a recent innovation.
Challenges for management accounting education
There are some obvious new directions, given the problems discussed in sections 2.5 to 2.5.5.4, in which to extend management accounting education. First, the traditional cost accounting model, developed for the mass production of a few standardised products, must be updated to accommodate the realities of the manufacturing environment since the 1980’s. Companies are now making fundamental changes to manufacturing operations in their organisations. These include JIT scheduling, Zero defect and Zero inventory production systems, and cooperative and flexible workforce management policies (Drury, 1988). The cost-accounting implications of these more advanced production control systems have barely been investigated and, as a result, our management accounting textbooks continue to describe production processes using extremely simplified models, such as the single product, deterministic EOQ formula. These materials are used in the teaching of management accounting and restricts the student’s capacity to see the impact of the realities of the latest manufacturing environment.
The challenges of the competitive environment in the 1980’s, which included JIT scheduling, Zero defect production systems and cooperative and flexible work-force management policies, caused companies to re-examine their traditional cost accounting and management control systems, because virtually all of the practices employed by companies during the 80’s and explicated in leading cost accounting textbooks had been developed by 1925 (Ashton, Hopper and Scapens, 1995; Emmanuel, Otley and Merchant, 1992; Kaplan and Atkinson, 1998).
Despite considerable changes (Russell and Kulesza, 2000) in the nature of organisations and the dimensions of competition during the past twenty years, the innovation in the design and implementation of cost accounting and management control systems have not been enough. Therefore, it is not only appropriate but also necessary that we understand the current business environment and how it reflects on the new demands for planning and control information, and to develop an education strategy to meet these new demands (Burns, 2000; Sharma, 2000).
The evolution of management accounting systems
Johnson and Kaplan (1987) state that the origins of modern management accounting can be traced to the emergence of managed, hierarchical enterprises in the early nineteenth century. Prior to this, virtually all transactions occurred between an owner-entrepreneur and individuals (such as raw materials suppliers, labour paid by piecework and customers) who were not part of the organisation. All transactions occurred in the market, and the owner could easily measure the success of each order by comparing the cash collected from customers with the cash paid out to the suppliers of production inputs. The double-entry bookkeeping system recorded money owing and owed, but did not act as an aid to decision-making and control.
The Industrial Revolution in the early nineteenth century resulted in the emergence of a factory system that dramatically changed the production process (Ashton, 2000: 76). Instead of entrepreneurs making contracts with workers who made goods in their own homes it became more efficient to invest in capital-intensive processes and hire workers on a long-term basis to perform multi-stage production processes within a centralised workplace.
The emergence of the factory system created a new demand for accounting information. Market information, which had automatically provided details of materials and piecework labour costs incurred in meeting each customer’s order, was no longer available. This created a need for cost accounting information to replace market information. In particular, information was required to determine the cost of the internal operations and also to measure the efficiency of converting materials leading to the finished product (Parker, 2002). The factories were frequently located a considerable distance form the head office of the owners, and an information system was required to judge the efficiency of the managers and workers at the factory.
Thus, for a textile factory internal measures were developed such as cost per hour or cost per pound produced for each process and each worker.
Johnson and Kaplan (1987) suggest that, notwithstanding the impact of the Industrial Revolution, the emergence and rapid growth of railways in the mid-nineteenth century was the major driving force in the development of management accounting systems.
New measures such as cost per ton-mile, cost per passenger mile and the ratio of operating expenses to revenues were created and reported on a segmental and regional basis. Many of the innovative management accounting measures developed by railway companies were subsequently absorbed and developed by other business sectors. For example, the large retail store chains such as Woolworths that developed in the late nineteenth century also needed measures to assess the efficiency of internal operations. Measures such as gross profits and stock turnover ratios to measure the profitability and efficiency of the different departments, were adopted and extended by these retailers.
1 Statement of the problem
1.1 Background
1.2 Statement of the research problem and sub-problems
1.3 Research strategy
1.4 The importance of the problem statement
2 Management accounting as a discipline
2.1 Conceptual foundations
2.2 The changing role of the management accountant
2.3 Management accounting and the rest of the organisation
2.4 Changing accounting practices – surveys in different countries
2.5 Problems in the management accounting environment
2.6 Challenges for management accounting education
3 Historical overview
3.1 The evolution of management accounting systems
3.2 The scientific management era
3.3 The growth of diversified organisations
3.4 The dominance of financial reporting
3.5 The period of lost relevance
3.6 Introduction to the changes in the teaching of Management Accounting
3.7 A half-century of management accounting education and practice.
3.8 Where are we today?
3.9 The future of management accounting education
3.10 Conclusion
4 The development of the questionnaire
4.1 Basic considerations
4.2 Questions asked
4.3 Structure of the questionnaire
4.4 Method used
4.5 Construction of the sample
4.6 List of the companies which were included in the sample
5 Results
5.1 Age of the respondents
5.2 Gender
5.3 Academic qualifications
5.4 Academic institutions
5.5 Professional qualifications
5.6 Job description
5.7 Industries in which the respondents are employed
5.8 The degree of competence in certain skills
5.9 The frequency of use of the techniques
5.10 Indication of the importance of change drivers in the management accounting work environment
5.11 The importance of personal judgement in relation to quantitive methods when performing tasks that involve evaluations and estimations
5.12 The appropriateness of management accounting education in the work environment of the respondents
5.13 Areas where a management accountant can add value to an organisation
5.14 Employment of candidates in a typical management accounting environment
5.15 Additional comments regarding management accounting education in South Africa
6 Solving of sub-problems and conclusion
6.1 The results of the questions relating to sub-problem 1
6.2 The results of the questions relating to sub-problem 2
6.3 The results of the questions relating to sub-problem 3
6.4 The results of the questions relating to sub-problem 4
6.5 The results of the questions relating to sub-problem 5
6.6 Conclusion
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