Institutional Pressures, Monopolistic Conditions, and the Implementation of Early Cost Management - Case Study Example

al Pressures, Monopolistic Conditions and The Implementation of Early Cost Management Critical Analysis of the Research Paper The analysis will proceed from section to section and provide commentary consistent with the chronology in which the text is presented. The work itself has relatively few subheadings and the discussions are lengthy under each subheading. The paper dwells more on a descriptive exposé of the cost management system then in place, and thereafter provides a general discussion on the subject matter described. 1.1 Overall description/summary of the research paper The academic article chosen for evaluation was authored by Salvador Carmona and Marta Macías. Salvador Carmona is a professor of Accounting and Finance, School of Social and Legal Sciences, Universidad Carlos III de Madrid. Marta Macías is an Associate Professor of Accounting and a Lecturer in the Area de Contabilidad y Control, Instituto de Empressa. The study’s declared objective is to assess the enforcement by law of cost and budgeting systems in the Royal Tobacco Factory of Seville (Spain), which the study focuses on because of its status as a manufactory of the state-owned monopoly (the tobacco industry). The goal is to understand the rationale behind implementing early cost management systems in firms that operate under monopolistic conditions, as well as the monopoly organization’s responses to these institutional pressures. 1.2 Critical Analysis Title The work to be analyzed is entitled Institutional Pressures, Monopolistic Conditions and the Implementation of Early Cost Management Practices: The Case of the Royal Tobacco Factory of Seville, (1820-1887). The title may appear to be long-winded, but in retrospect after perusal of the paper, it appears that the title actually encapsulates the focus and direction of the subject discussed, and an immediate notion is formed in the mind of the informed reader concerning the topic. The paper assumes, from the onset, that the reader is conversant with the basic theories of accounting systems, and would find interest in the particulars of state-imposed early cost management system in a monopoly industry. No change in the title is suggested. Introduction The introduction is appropriately organized. It begins by providing a situationer concerning existing schools of thought, identifying, differentiating, and then finding commonalities among them, and to the interested reader this sets the foundation for the ensuring discussion. After providing the context in which the topic is to be viewed, the authors articulate the objective of the study – specifically, “the design and implementation of budgeting and costing systems in … the Royal Tobacco Factory of Seville…1820-87.” The choice of time period was also explained in the introduction, as well as the choice of organization to analyze. The authors admit, however, that this is the third study on the Royal Tobacco Factory (RTF), and although it was explained how this study differed from the other two studies, it is not apparent why the RTF was chosen as the organization to be studied once more. One may suspect that this is one of those few old institutions on which there happens to be a thorough, if not complete, set of records or information, and which happens to be ideally situated in the field of study (i.e., state manufactory in an industrial monopoly). However, this is not explained in the study. One wonders whether or not another institution other than the RTF would have been available for study, and would have brought to light other findings than those arrived at with RTF. As it is, this study is presented as a historical-descriptive case study, being involved as it is in the analysis of a limited phenomenon as it occurred in a single organization at a concise point in time. These factors considered, the unique elements in the situation still render it worthy of study, and the findings at the end would still be of strong academic value. It might have been better, though, if there were at least 2 or 3 such institutions to study jointly, to discover if commonalities exist among them that may form a stronger generalization. While this may be difficult and errors may be introduced because monopoly industries are not common, and variations between industries may affect comparability, still the observations from 2 or 3 firms would provide better grounding comparatively than just observations from only one firm. The Framework of Institutional Sociology The study presented the framework suggested by institutional sociology as the structure to be followed by the discussion on RTF. Cost accounting is viewed as a for of institutional pressure imposed on organizations to encourage conformity with norms of behaviour and ensuring a desirable level of performance. Types of isomorphism are described – coercive, mimetic, and normative – as well as how they exert influence on organizational compliance. After identifying the types and nature of institutional pressures, the strategic responses of the subject organization to these pressures is likewise described. These are acquiescence, compromise, avoidance, defiance and manipulation; however, these strategic responses are manifested in the form of fifteen possible tactics, which the study classified based on their corresponding strategies. The authors then allege that external or apparent conformity is not always consistent with internal, actual, compliant behaviour, implying that managers may have a greater interest to portray a semblance of efficiency and conformity for its external constituents, rather than in actually carrying out the programs indicated – a phenomenon called “decoupling”. The authors give a thorough treatment of the organization in the light of institutional sociology, while at the end informs the reader of a dissociation of accounting paradigms with this framework chosen. The study states that in the light of the institutional sociology framework, according is perceived more as a “legitimating device rather than as a craft that instils rationality in organizations” (Carmona & Macias, 2001, p. 145). Accounting is therefore no longer seen as an objective, impartial tool for discipline and surveillance, but as a instrument used by management to justify or legitimate its decisions and actions to it external publics. If such it true, then the authors by taking this frame of mind begins from a presumption that accounting – and therefore cost management – is used not to perform its real function of reporting financial activities and conditions, but as a public relations instrument of management. Proceeding from this presumption, it is difficult to see how this study could arrive at an impartial assessment of early cost management. The framework imputes that the state’s early cost management initiative is not for the purpose of regulation or assessment of performance, but as a manipulative tool for conveying a certain picture while in actuality doing something else. It would appear then that the premises form which this study springs admits of prejudices by the authors that accounting is little more than a legitimating device by which external perception is concocted or fabricated. Substantially, then, the framework appears prejudicial in the sense that it incorporates a controversial point of view that the accounting profession may find repulsive. It insinuates that accounting tenets support the misinformation of the public by leading them to believe in what is not true, rather than enabling them to discern what is true. It becomes a tool for deception rather than discovery. “Under the tradition of institutional sociology, the purposive objectivity of accounting calculations targets the external legitimation of managerial decisions rather than the deployment of regimes of discipline and surveillance…” Understandably, such a viewpoint, whether or not for academic purposes, would not sit kindly with accounting professionals, especially since it is merely posited, with no factual evidence presented in the study. The Contexts of the Tobacco Industry The Privatisation of the Monopoly. There is a rather long historical discourse about how the tobacco monopoly came to be created in Spain, during 1820-87. While it is true that an understanding of the strengths and weaknesses of an industrial monopoly on tobacco, as viewed during the time, is essential to the understanding of the motives of the state in imposing early cost management, it is not necessary nor helpful to have a long-winded narration of the details of the events that led to the creation of the monopoly. It may simply be stated, though not very explicitly, that certain parties were for privatization and against nationalization of the tobacco industry, and what their reasons were. Furthermore, the subtitle given to this portion of the discussion is a misnomer. The entire portion delves into the state ownership and administration of the industry, with a brief and unsuccessful sojourn into privatization coupled with smuggling, and only towards the end mentions its lease to a minor noble, the Marqués de Salamanca, with the state maintaining administration. Privatisation in this discussion was only an incidental in the middle and towards the end of the discussion, with the major portion being devoted to the historical events At this point, it is also appropriate to mention that the general style of the study is verbose and the organization into writing makes use of long, uninterrupted paragraphs that are difficult to read. It will do well to break down the paragraphs into discrete ideas on which the mind of the reader may concentrate. As such, several ideas are presented in one paragraph, making the paper a confusing read. This appears to be the case throughout the essay. It would be most helpful if the ideas were better organized into manageable statements that convey concise ideas. The philosophical intricacies could be conveyed just as effectively, if not more so, with direct statements than roundabout ones. The Industry and the Focal Organization This segment described the tobacco industry as monopoly and the organization (RTF) as the focus of discussion. A change in accounting viewpoint changed the way the industry and organization conceived of its processes, in terms of cost rather than production centers, and the increased integration among the factories within the industry. While the descriptions generally are useful in gaining a picture of the industry and its nature as monopoly, the main ideas are again lost in the details, without necessarily tying in the details into a cogent whole. Furthermore, the earlier discussion on the industry was only loosely tied in to the development of the discussion on the focal organization (the RTF). Other than saying that “changes in the external environment of the factory considerably affected its internal organization.” The changes were mentioned, but the causality was not. For instance the change in number of factories from 2 to 6 in RTF was mentioned, but tying this in with the wider, external changes in the industry is a leap of faith, or rather conjecture. Budgeting and the RTF This portion of the study describes the general systems and shortcomings in the budgeting, cash release, and reporting systems of the RTF. From the subtitle, the reader would normally expect some description of the protocol in the budgeting and reporting systems, and how these operated with the cash disbursement function. However, none were offered; and even the mention of public sector reform (in 1850) was not supported by the type or manner of reform that was provided. It is helpful that the text mentioned the greater flexibility afforded by a monthly production plan issued by the Steering Agency and the forecasted expenses issued by the factory. This portion of the discussion did not so much highlight to the reader the changes in the accounting systems, but referred more to what may be seen as symptoms of strategic inconsistencies in the running of the organization. The fault lay not on the accounting system, but the failure to read the market and arrive at realistic forecasts so that the budget would be better prepared; or, having such budgets and, presumably, production schedules on which the budgets were based, how it was that the production was altered and increased without a corresponding increase in cost allocation and budget. Adhering to the budgets would, it appears, meant only producing under what the market could absorb, but there must be an authority which would have approved the augmentations in the production plans, which naturally, using whatever accounting system was in place, would have meant authorizing an increase in cost allocation that would have taken place after a verification of the sufficiency of cash. In short, based on this segment, it is not the cost management function that appears wanting, but the strategic management of the organization, where management decisions are integrated among concerns in finance, marketing, and production. Marketing having determined a greater demand, management would have authorized an increase in production after ascertaining the availability of finance. After all, although cost and production are clearly described, the added revenues brought by the sale of more of the product should have enabled the release of augmented budgets to match the higher level of production. Failures in Budget Reporting This short segment, that appears to be an adjunct to the subsection on budgeting, These appear to be the true legitimate accounting issues in the matter of the inadequacy of the budget or of releases of funds for production. However, the items enumerated here appear minor and insignificant isolated incidents rather than a systemic fault to which failure could be attributed. There are four memoranda, spread over the years 1838 to 1866, or a span of 28 years. Of the four memoranda mentioned, one (1838) was a request for information without any inference to regulatory violation for non-reporting. Another was an internal memorandum from the Steering Committee to RTF for the submission of delayed budget figures (1865-66). Although the tone was more urgent delay was mentioned, it was by no means conveyed as a command, nor did it insinuate reproach against RTF. A third memorandum (1861) did convey a demand from the Steering Agency of the delayed figures, insinuating by its insistence the negligence of the RTF to perform its reportorial duties. The fourth memorandum was nothing like the other three. It was a memorandum from the RTF, reporting purportedly to the Steering Agency or some similar authority, that confusion has resulted from the organizational changes to which the RTF was subjected, and appears, for all intents and purposes, to be a bona fide explanation of delayed or improperly accomplished reports. The four incidences are mentioned in the study as “the complete list of the RTF’s failures to report.” It is not sure if this is only the complete list of available reports, of it if is the complete list of reports that have ever been issued for the firm. If this is the exhaustive list, then there appears to be no evidence that RTF failed significantly in the preparing and transmittal of budget reports. After all 4 incidences of reporting delinquency in the span of 28 years is sterling even in today’s standards, with the modern multimedia and digital communication technology. Costing in the RTF In the RTF, as with other tobacco factories of the period, requests for cost information was variable and inconsistent, which afforded the RTF reasons for non-compliance. The study discussed this in the nature of a narrative, with selected excerpts from different administrative circulars and memoranda to substantiate the observation. While the discussion was well executed in this respect, the discussion concentrated on the frequency of report transmittal and little was mentioned about the quality of the report. Some discussion delved briefly into the source of cost information, assignment of cost components, and cost allocations, but these were merely mentioned and not profoundly treated. These aspects would have proved interesting, at least as much as frequency and regularity of report generation. The Use of Cost Reports Contrary to this study’s earlier allegations, it found evidence that cost management was conducted in RTF to attain a higher level of performance and exercise greater control over the use of resources. Earlier, this study stated that ulterior motives in management and among the regulators were the primary purpose of cost management in the case of RTF. Supposedly, management used cost accounting as a legitimising tool for a favourable external projection of the company’s image, while regulators, desirous of exerting their superiority over a firm that has entered into privatization, employed cost controls in the form of a power play. In the discussion of the use of the cost reports, it has become evident that documentary proof exists to the effect that cost figures were used “to assess cost performance of factories”, and as basis for assessing damages to inventory during transportation either in the process of distribution to the market or in transit to other factories. There is, therefore, functional value in the use of cost information other than those initially implied by institutional sociology. Failures of the RTF to Report Costing Information This portion was a mere enumeration of the documented instances when RTF failed to, delayed in, or lacked in the transmittal of cost information reports to the Steering Agency. Discussion The discussion portion for the most part contained a summary of the study, and a reiteration of some of the evidences presented in the course of the study. The conclusion did not stray far from the initial premises presented at the beginning of the paper – that the mandatory enactments were a sort of “signalling” by the Steering Agency of its dominant position over the monopoly, and for managers to convey their competency and worthiness to keep their jobs and their compensation packages. Cost data was primarily viewed as “justification to legitimate their past undertakings in the monopoly” (Carmona & Macias, 2001, p. 157), thereby making the case for institutional sociology. This conclusion does not seem to be particularly supported by the facts, although they are not necessarily debunked either. The case for it is weak given the data provided, at least in this study. A better case would have been made for performance level and efficiency in allocation of resources as the goals of early cost management practices. Comparison to another article A study was chosen with which to compare the article being analyzed presently. Entitled “Early cost management practices, state ownership and market competition: the case of the Royal Textile Mill of Guadalajara, 1717-44”, the paper was co-authored by Eva Carmona and Donato Gómez. It was chosen for comparison purposes because of some similarities that parallel the first study. The topic remains within the area of early cost management practices, the firm being assessed is likewise a state-administered firm, and the context, while not in Spain as in the former study, is still Hispanic during the colonial period, and therefore compatible insofar as accounting systems and methods are concerned. The markets differ, however, with this second study being situated in a competitive market while the former study is located in a monopoly industry. Furthermore this second study predates the first by more than a century, covering the years 1717-1744 while the other is situated in the years 1820-1887. Though the time discrepancy may detract from the comparability, the two seen as case studies in the development or early cost management practices presents an occasion to draw interesting insights. In the case of the Royal Textile Mill (RTM) of Guadalajara, as compared to the RTF of Seville, textiles produced by the RTM had to compete with foreign garments that dominated Spanish markets at the time. During this time, the organization of productive enterprises was in the form of medieval guilds. In the RTM study, it is a refreshing thing to notice that the language of the piece is considerably easier to understand than that of the RTF study. The tone and vocabulary are more straightforward and the organization of ideas more coherent. Although RTM is organized using the guild system, the authors were still able to prepare an organizational chart for it which, being in diagram form, is able to convey a clearer picture of the operations of the firm. Furthermore, discussion and commentary in the RTM study dealt more on the financial situation and accounting procedures of the company. Most importantly, in the RTM study there is a straightforward investigation into the accounting practices of the firm, and did not employ the institutional sociology framework that dominated in the RTF study. Therefore, there was less philosophical discourse, and less speculation as to the motives of the actors in undertaking the cost management practices. The RTM study concluded that cost accounting techniques were already in place even during the time of the guilds, comprising aspects like control of raw materials usage and minimization of waste, control of labour and management, and the allocation of overhead to product costing. These are useful findings that would find greater appreciation among accounting professionals and serious students of management accounting theory, than the findings drawn by the RTF study. 1.3 Implications for Management Accounting The RTF study brought to light the rationale for early cost management practices in a situation that does not particularly demand efficient performance or competitiveness, because of the industry’s monopoly situation. Findings revealed that aside from organizational politics, cost data attributed to better inventory valuation and more flexible budgeting techniques. In present-day management accounting, the relationship between information and decision making still holds. In the budgeting procedure, it is still the lower organizational units that prepare the cost information, while the higher echelons of management determine the strategic use of resources based on this information. Absent such information, as in the case of RTF, insufficient budgetary allocations are made and therefore shortfalls in production materials and resources, and labour unrest due to cuts or interruptions in compensation. Today, as in the time of the RTF case, there is a necessity for timely and accurate information for the right decisions to be made, and a flexible system should be in place to adjust to unexpected changes in the market or in production. 2 Suggestions for Improvements The study is highly focused in its scope, and starts with a premise that is itself its conclusion. Understandably, the data and analysis are qualitative in nature, however because the data, being archived, are likewise limited in quantity and scope, there is a constraint in the application of exhaustion sampling that is usually desirable in qualitative data analysis, as exhaustion is too quickly reached. It is just possible that there is too little data available for this purpose, for which the formulation of generalizations should be carefully contemplated. As to style, the study may be improved by a change in approach, if it is possible, given the philosophical content of the study. As it is, only those who are steeped in philosophical discourse would be comfortable with the style, but most business and accounting students, who are also presumed to be target audiences for this discussion, would not be encouraged to peruse beyond the abstract. Finally, in deference to the accounting profession, business, and regulators, the paper should probably reconsider the implications of its assertion that the cost management (as well as other accounting and probably business) processes are mere legitimating instruments. Human behaviour is but one small element to be considered in the analysis of institutional processes. The bodies of knowledge this study purports to relegate to the level of a tool for the manipulation of external perceptions is presumptuous and trivializing, and should be rephrased in this study. References Carmona, Eva & Gómez, Donato 2002 Early cost management practices, state ownership and market competition: the case of the Royal Textile Mill of Guadalajara, 1717–44. Accounting, Business & Financial History, Jul 2002, Vol. 12 Issue 2, p231-251; DOI: 10.1080/09585200210134938 Carmona, Salvador & Macías, Marta 2001 Institutional Pressures, Monopolistic Conditions and the Implementation of Early Cost Management Practices: The Case of the Royal Tobacco Factory of Seville (1820-1887). Abacus. Vol. 37, no. 2, pp. 139-165 Reflective Summary (covering both the learning process and reflections on the content of the group’s critical analysis of the research paper) Learning, much like a journey, begins with the first push into the open sea of uncertainty. Upon first reading the paper, we felt a general sense of confusion as to what the authors wanted to convey. Maybe it is because accounting, as with other “hard” aspects of finance and business, is generally conceived of as an objective undertaking farthest removed from the “soft” areas of philosophical discussion. However, accounting is still a human undertaking, and as such is also influenced by human thought and behaviour. A search for motivations of actors in the creation and implementation of any system encompassing human activity – such as aspects of accounting systems – is a valid research topic. Despite the presence of ulterior motives among managers, regulators, and firms, for the accounting profession to have such rigid frameworks, standardized processes, and conventions as it presently has, there is a strong and valid reason for its existence and development other than just a legitimating tool. For a study to proceed primarily on the basis of the treatment of accounting as a trivial façade-building tool is questionable. In understanding the motivations of actors, the firm and the profession should also be given due deference as actors themselves in this situation. Cost accounting and other managerial accounting techniques are valuable weapons in the arsenal of legitimate management in decision-making. Wise and responsible stewardship of a business firm requires competency in the use of financial data. Greater regard should be given this field than just the advancement of certain private interests, which may in actually be true of a minority of the actors being considered. Read More