Managerial and Cost Accounting - Assignment Example

The first article is “Management Accounting: A Personal History.” This article was published on 1st January in the year 2003 in the Journal of Management Accounting Research. The author of the article is Robert N. Antony. The author of the article talks about the evolution of Management Accounting as a branch of accounting and his relationship and contribution to the field of Management Accounting. According to the author of the article, the evolution of the field of Management Accounting as a separate branch of accounting dates back to the late 1930s. It was during this decade Ross G. Walker joined the faculty of the Harvard Business School. He came from a successful management position in a business corporation and was one of the few faculty members without a doctorate degree recruited by Harvard (Antony, 2003). Mr. Ross used to influence people only through his teaching inside the classroom. He neither wrote an article or a book in order to influence people like most writer or professors generally do. The author became a research assistant to Mr. Ross in the year 1940 for a second-year course named Control, a course which is a sort of contrast with the traditional Cost Accounting course. Nevertheless, the course became successful as a result of the reputation Mr. Ross has got as an impressive teacher of accounting at Harvard. The first appearance of management accounting in textbooks was, I believe, a first-year accounting text entitled Management Accounting: Text and Cases (Anthony; now Anthony and Reece) published in 1956. This text contained a series of detailed cost-accounting cases. A similar text by Massachusetts Institute of Technology professors appeared at approximately the same time written by Hill and Gordon in the year 1959. In the year 1965, a monograph named Planning and Control Systems – A Framework for Analysis, written by the author was published by the Harvard Business School. It was the culmination of a series of meetings of the Harvard Business School Control faculty. Unlike most other Harvard Business School publications at that time, it proposed a framework rather than describing the results of a study of actual performance (Antony, 2003). It was written in the article that there is a contrast between Management Accounting and Cost Accounting. The terms “cost accounting” and “management accounting” have sometimes been used synonymously by many accountants in recent years. But these two systems of accounting are not the same. Despite the fact that the subject matter of cost accounting has broadened over the years, it is, however, concerned mainly with the techniques of product costing and deals with only cost and price information. It is limited to product costing procedures and related information processing. It helps management in planning and controlling costs relating to both production and distribution activities. By nature, management accounting refers t reports prepared to fulfill the needs of management. Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information that assists managers in specific decision-making within the framework of fulfilling the organizational objectives (The ICFAI University Press, 2004). The accounting statements and reports in management accounting are situation-specific. That is, management accounting reports attempt to fill the information needs of managers with respect to a specific problem, situation, or decision. Management accounting is not confined to the area of product costing, cost and price information. In management accounting, the objective is to have a data pool which will provide any and all information that management may need. For example, if management decided to depend on long – term debt for expansion of business, it may be investigated as to what effect this decision will have upon the earning per share? Should debt in the capital structure be too large or small? Similarly, management may be interested in knowing the adequacy of cash inflows to pay current obligations or the effect of inflation on business decisions and performance. Thus, management accounting helps management deal with the total situation. In achieving this goal, management accounting makes use of information that is drawn from financial accounting and other disciplines, such as economics, finance, statistics, operational research and the like. Now-a-days, the terms “cost accounting” and “management accounting” are used interchangeably. The author feels that the shift from cost accounting to management accounting was quite sudden. During 1962, when the author was a consulting editor to Richard D. Irwin, a leading cost accounting text was published, the sales of which dropped because of the shift from cost to management accounting was not clearly updated. There was only a slight transition made about the shift in the text. Instead, Chuck Horngrens text retained the title "cost accounting," but the contents emphasized the shift to management accounting, and his text became dominant. Also in the 1960s, measure of "transfer price" became an important topic. Revenues and expenses move from one responsibility center to another. This topic even was discussed at length in Section 482 of the Internal Revenue Code. One of the most important operating decisions that a management must make is the pricing decision. Pricing refers to the assignment of a selling price to a product or service provided by the company. A company’s long range survival depends on its pricing decision. In the long run, the firm’s prices must be sufficient to cover all costs and leave a profit margin, adequate to reward the investors. If the firm’s revenue consistently fails to cover costs and provide a satisfactory profit, the investors will seek new opportunities and the firm will fail. Pricing activities are more extensive than many people realize. It is easy to visualize the need to price each product in a department store or electrical goods store, but all organizations that provide a service for a fee or sell a product must decide on the amount to charge for each service or product. Thus the number of products and services to be priced is quite large. Besides that, pricing does not end with a single price decision for each product or service. Prices must be continuously updated to ensure that thy reflect management’s desires in light of current costs, market conditions, and competitor actions. The application of these management accounting concepts to specific areas was described in a 1965 study by James Hekimian on life insurance. This theme was expanded in my document headed "Structure of This Set of Generalizations" of about 30 pages (Antony, 2003). In the 1970s, many companies created corporate planning staffs, often quite large, whose task was to analyze possible new strategies. In the 1980s, many of these staffs were reduced and in some cases eliminated. The reasoning was that the planning staffs tended to stifle the acceptance of ideas generated elsewhere. In an organizational context, data represents facts or values of results, and relations between data and other relations have the capacity to represent information. Patterns of relations of data and information and other patterns have the capacity to represent knowledge. For the representation to be of any utility it must be understood, and when understood the representation is information or knowledge to the one that understands. The value of Knowledge Management relates directly to the effectiveness with which the managed knowledge enables the members of the organization to deal with todays situations and effectively envision and create their future. Without on-demand access to managed knowledge, every situation is addressed based on what the individual or group brings to the situation with them. With on-demand access to managed knowledge, every situation is addressed with the sum total of everything anyone in the organization has ever learned about a situation of a similar nature. Some of the current challenges businesses face includes: • A growing emphasis on creating customer value and improving customer service; • An increasingly competitive marketplace with a rising rate of innovation; • Reduced cycle times and shortened product development times; • A need for organizational adaptation because of changing business rules and assumptions; • A requirement to operate with a shrinking number of assets (people, inventory, and facilities); • A reduction in the amount of time employees are given to acquire new knowledge; and • Changes in strategic directions and workforce mobility that lead to knowledge loss. Strategic management involves the planning, directing, organising and controlling of a company’s strategic-related decisions and actions. An important aspect of the controlling function of a company’s strategy is the fourth task, analysing the company’s options by matching its resources with the external environment (Badu). Another aspect which is important in management accounting is the concept of budgeting. In 1977 President Jimmy Carter ordered the federal budget be arranged according to the zero-base budgeting system. This system stipulates the requirement that each appropriation in a budget year should justify the amount in excess of zero. Carter had used this system while in office in Georgia. The federal departments and agencies complied but only in a window-dressing way. Going back to zero obviously is not practical. The only practical version is to study the proposed changes from the current year, or the amount stated in the strategic plan (Antony, 2003). The application of management control concepts to the Department of Defense is described in "New Frontiers in Financial Management" (Financial Management Institute, June 23, 1961). It is amplified in the speech "Guidelines for an Accounting System in the Department of Defense" (condensed version, December 15, 1961), based on work done for the United States Air Force, 1952-54, co-directed by the author and Ross Walker. Research Development Management was also another important concept that gained popularity with respect to managerial and cost accounting. The author’s own research in the late 1940s focused on research control. It was especially interesting because the results likely to be obtained from a given expenditure of money cannot be reliably determined, and therefore expenses cannot be matched with resulting products or processes, at the time the budget is prepared. Nevertheless control of accounting research followed sound principles in well-managed laboratories. The author of this article Mr. Robert N. Antony has been interested in federal accounting since the 1950s. In his first congressional testimony in 1956, the author emphasized the desirability of basing operating appropriations on costs incurred, rather than obligations. The author has still got a strong belief that this change was desirable. The second article that is being discussed is “The value of activity-based costing in competitive pricing decisions” published in the same journal i.e. Journal for Management Accounting Research on 1st January 2004. This article was written by Eddy Cardinaels, Fillip Roodhooft and Luk Warlop. This paper reports experimental evidence on the merits of activity-based costing (ABC) for price-setting in competitive markets that differ in their ability to provide informative feedback. Earlier research has shown that informative market feedback dominates the effects of cost-system design. In a multimarket context involving cost allocations, the present results suggest that cost-system refinement can play a significant role in price-setting, even in the presence of informative market feedback. Specifically, ABC provides benefits over volume-based costing in market segments in which biased cost allocations produce accounting losses that hinder learning from superior competitors. Compared to these informative settings, additional evidence also shows that performance is negatively affected by less informative market feedback. Yet in less informative settings, ABC still outperforms traditional costing, presumably because it helps to filter irrelevant competitor feedback from the decision process (Eddy Cardinaels, 2004). This study provides experimental evidence on the potential benefits of alternative cost systems for pricing decisions in a competitive market context. More refined costing systems, such as activity-based costing (ABC), are often claimed to have a value-enhancing effect on pricing decisions and profit performance (Cooper 1988; Kaplan and Atkinson 1998; Goebel et al. 1998) because they allow better price differentiation among products, customers, and markets. Gupta and King (1997) show that the benefits of cost system refinement for decision making apply to individual market settings in which firms act as monopolists. Most studies on the role of accounting data for price-setting study decision makers in individual settings. Early studies concluded that cost system choice mattered; since decision makers relied heavily on a given cost systems output (Ashton 1976; Barnes and Webb 1986; Dyckman et al. 1982). Wilner and Birnberg (1986) and Moon (1990) proposed that certain types of feedback might mitigate such reliance on the cost system. Latter studies documented only small mitigating effects of outcome feedback, financial rewards (Briers et al. 1997), or process feedback (Gupta and King 1997); most participants still relied on their cost system for subsequent adjustments of the decision process. Hence, accurate cost systems such as ABC continued to confer a significant benefit over distorted cost data in individual settings without other market agents (Gupta and King 1997; Briers et al. 1997). In a multimarket setting, traditional costing can produce biased cost estimates in heterogeneous markets (Cooper and Kaplan 1998). When such cost allocations overestimate or underestimate costs for a particular market segment, firms cost systems may report accounting losses or profits for markets that actually are profitable (unprofitable). Briers et al. (1999) investigated the effects of biased cost data in a multiproduct context. Although they found that participants with biased cost data made improved pricing decisions when they received market feedback in the form of a benchmark report about the best practice of other firms, their experimental task did not involve any direct competition (Briers et al. 1999, 80). Second, they studied volume-based cost reports, but they did not directly test the effects of an ABC system. Therefore, whether feedback of superior market rivals reduces the incremental value of ABC relative to biased cost data in a competitive multimarket context involving cost allocations remains an open question. This important issue is the central focus of our investigation. If cost allocations produce accounting losses under volume-based costing but not under a more accurate ABC report, then ABC could facilitate competitive pricing even if market feedback is informative, to the extent that market agents underutilize market feedback under traditional costing in order to avoid accounting losses (Eddy Cardinaels, 2004). As a second contribution, the authors consider market feedback that is not always diagnostic. Some market rivals may act on limited information such that their pricing decisions fail to reflect actual demand and cost parameters (Coughlan and Mantrala 1992, 91). Iselin (1996, 150) argues that such a situation would reduce performance to the extent that decision makers act on such irrelevant market cues. In turn, performance would be enhanced if irrelevant market cues were filtered from the decision process. In this respect, ABC offers an important advantage over biased cost data. The more accurate cost data means that participants with ABC would be more likely to detect and filter competitors prices when these prices are a poor reflection of actual costs than would participants with biased cost data. Consequently, prices under ABC are likely to be based on more accurate cost data (Ashton 1976; Briers et al. 1997) rather than on less relevant market feedback. Therefore, better performance is expected under Activity Based Costing. As part of the research the authors administered a repeated price-setting experiment with participants playing against a computer-modeled competitor (Bertrand duopoly) in two market segments with heterogeneous costs. Aside from outcome feedback, participants receive imperfect cost reports like either ABC or traditional volume-based costing and market feedback which are either informative or uninformative in the form of a report containing the price choices and the profit of their competitor. Market feedback is labeled "informative" when the rival is set to play optimally with full knowledge of market parameters. The feedback is labeled as "uninformative" when the rival acts randomly, given a participants prices, because then a competitor report does not convey relevant cues of "optimal" behavior. The research and market study resulted in different hypothesis which states that Prices and profits are closer to optimal when participants receive informative market feedback than when they receive uninformative market feedback. Another finding of the market study is that the benefits of ABC over biased cost data for price-setting fall as market feedback becomes highly informative. Due to the focus on a multimarket context, the experimental setting defines two market segments which are denoted A and B, in which participants compete on price against a computer-modeled competitor. A typical Bertrand demand function for differentiated products i.e., products with different brand names and defines each market segment in a manner similar to that of Callahan and Gabriel (1998). The participants consisted of 131 students from a masters cost-accounting course at the University of Leuven, Belgium. The course had covered the differences between ABC and traditional cost reports, and had discussed the use of ABC for segment profitability analysis and price-setting. The participants randomly assigned to the experimental cells upon entering the computer lab. Each session lasted one hour. Cost functions in each market segment are the same for the participant and the computerized competitor. Given identical cost functions, the task faced by participants is similar to that of their rivals, and in this way competitors may serve as a useful source for comparison. Participants attempted to maximize profits by differentiating prices across market segments based on imperfect cost reports and market feedback. Two factors were manipulated between the subjects. The first factor is market feedback in the form of a report containing the competitors previous period price choices and corresponding total profit. Market feedback is either highly informative and is modeled as a rival making optimal price choices or uninformative which is modeled as a competitor setting a random price close to the participants price. The competitor always moves second, after participants make their price choices. The second factor is the accounting report type. Instead of actual cost data, participants received imperfect cost reports as shown in Appendix A. Half of the participants received an ABC report. The system used a two-stage procedure (Kaplan and Atkinson 1998), which first allocated customer costs to three marketing activities i.e., ordering, software handling, and delivery. Next, the ABC procedure allocated the cost of each activity across the two market segments via their respective activity drivers (number of orders, software licenses, and deliveries). Market A consumed more of these activities than market B, rendering it more costly to serve. ABC figures approximate the actual cost of serving the two market segments more closely than does the traditional cost system. The remaining error in the ABC cost data reflects the use of linear drivers to approximate the nonlinear cost function. The results of the study were as follows. The primary dependent variable is the participants best profit score, i.e., his or her highest profit over the ten periods. To check the robustness of this approach, the results based on the average of the subjects best five scores were also reported. The focus was on best or better scores in the entire setting because they were less sensitive to the few outlying observations resulting from trial and error behavior in the initial phases of our experiment. The interaction term between accounting report and market feedback (H2) is not significant. The second hypothesis, which predicts that ABC is beneficial to profit performance when market feedback is uninformative i.e., when competitor sets price randomly, but not when market feedback is informative i.e., when competitor sets price optimally) is therefore not supported. Only the main effect of accounting report type is significant, consistent with ABC having value in both the uninformative market and in the highly informative market. Apparently, the opportunity to learn from a well-informed competitor did not make accurate ABC cost data redundant. This study investigates the potential benefits of ABC for price-setting in competitive markets that differ in the degree to which a competitors results provide informative feedback. Prior research (Waller et al. 1999) concluded that the effects of alternative cost systems do not persist when there is opportunity to learn from the market. An important contribution of our study is demonstrating that such conclusions are not always valid in a multimarket context involving cost allocations across markets. It is shown that in a market segment in which optimal pricing decisions produce accounting losses under volume-based costing but not under ABC, market agents with biased cost data underutilize informative market feedback. Due to the fact that subjects are averse to such losses, prices are based on biased cost data, rather than on competitive market feedback and performance are worse than under more accurate ABC costing. Conversely, in a market setting in which both volume-based costing and ABC produce accounting profits under optimal pricing, the results corroborate those of Waller et al. (1999) that informative competitor feedback can dominate more accurate cost data. Bibliography 1. Antony, R. N. (2003). Management Accounting: A Personal History. Journal of Management Accounting Research , 2-6. 2. Badu, E. E. (2002). Macro Environment Analysis for Strategic Management. Libri , 2-6. 3. Eddy Cardinaels, F. R. (2004). Th value of activity based costing in competitive pricing decsisions. Journal of Management Accounting Research , 1-5. 4. The ICFAI University Press. (2004). Introduction to Management Accounting. Hyderabad: The ICFAI University Press. Read More