Accounting for Strategy and Management Control - Korpi & Ala-Risku - Research Paper Example

Accounting for Strategy and Management Control Index Title page 1 Index 2 Introduction 3 1. Critical Analysis of Korpi & Ala-Risku (2008 3 1.1 Overall description/summary of the research paper 3 1.2 Critical analysis 4 Title 4 Introduction 4 Literature review 6 Research design 7 Research results 9 Conclusion 13 Comparison to another article 14 1.3 Implications for management accounting 15 2. Suggestions for improvements 16 3. Description of the planning of the analysis of the research paper 16 Timetable of analysis 17 References 17 Accounting for Strategy and Management Control “Life Cycle Costing” According to Marx’s argument in Capital, accounting has two essential functions. The first is “the function of recognition and control of the economic process,” while the second is “the function of mediating the metamorphosis of economic value” (Oguri, 2005). The former is process-oriented, a matter of form, while the second is value-oriented, a matter of substance. Both these functions are important to consider in devising a system for producing information important to management. Life cycle costing is one technique created a quarter century ago that is thought to improve compliance with the control requirement while enhancing asset value (Dhillon, 1989). After all, the purpose of managers is to exercise control of business processes as well as to mediate in the transformation of resources and creation of value. It is against this background that two academic articles, describing studies on life cycle costing, shall be evaluated and compared. 1. Critical Analysis of Korpi & Ala-Risku (2008) 1.1 Overall description/ summary of the research paper The article to be critiqued is “Life cycle costing: a review of published case studies,” which deals with life cycle costing as a method used in managerial accounting. The article is a qualitative study of existing literature on the topic of life cycle costing. The authors are Erik Korpi and Timo Ala-Risku, professors of the Department of Engineering and Management, Helsinki University of Technology in Finland, and have numerous other written academic studies to their name, which is testament to their expertise on the subject. 1.2 Critical Analysis Title The title “Life cycle costing: a review of published case studies” while concise and accurate, does not give any indication of the purpose for the review. It gives the impression that the authors are merely conducting an enumeration of existing case studies without any substantive purpose. A clue as to the direction of the study should give the readers a better grasp of the eventual conclusion reached by the authors, so that from the outset the readers could determine if the article is going to suit their purposes or not. A better alternative to the title could be: “A summary review and typology of the applications of Life Cycle Costing in case study literature”. In this manner, it is clear that the outcome of the study is a categorization of Life Cycle Costing case studies from existing academic and professional journals. Introduction The opening quotation used by the article is strong and impressive because it provides an essential definition while at the same time impressing in the minds of the readers the topic of discussion. The study chose to source its data from existing literature, mentioning their reason as the small amount of cross-case studies. Other than the strong opening statement, the rest of the introduction appears to be quite vague about why the study is being carried out. There is an implicit assumption that life cycle costing is superior to initial investment costing, because the introductory paragraph laments that the adoption of LCC has been relatively slow, attributing this to the lack of standard or formal guidelines. The reader remains unconvinced about this. The fact that life cycle costs can be many times the initial purchase or investment cost may be immaterial in most cases, especially in a productive enterprise when the investment will be generating its own returns. The purpose of the initial investment costing is for procurement purposes, most importantly to ensure the necessary cash availability. Determining the cost of an asset throughout its life may not be a material consideration at the time it is purchased, because the farther into the future one predicts, the more speculative the resulting assessment is and the less useful for decision making at the operations level. LCC may not be relevant in many cases where a capital budgeting (NPV or ROI) analysis would be preferable, since these take into account the revenues as well as the costs during the lifetime of the asset. The study further states that it is embarking on the cross-case analysis of multiples studies because such kind of cases number “extremely low”. The authors should have stated why it was important to do a cross-case, or why should it be explored across different business contexts, compared to what it says the other authors have done for limited contexts. The limitation is understandable, because it gives a greater value to students of that particular context. The study should have given a reason why a generalized review using cross-case analysis is important functionally, because there will be few applications for a general study. In the introduction, the authors provide an overview of the structure of the study, which is a helpful guide in perusing through the rest of the study. However, at the end of the introduction the reader is still uncertain of the focus of the study, and expects that this shall become clearer to him as his reading of the study progresses. Literature review Background The review opens with a helpful glimpse of origins of LCC and its usefulness for military procurement. It goes on to mention that total cost ownership (TCO) and life cycle assessment (LCA) have received a wider and more favourable reception in business applications than LCC. It then goes on to justify why LCC is better than the two and why it should be more applied than them. What it does not say is what advantages the present users enjoy from TCO and LCA that they do not find in LCC. Businessmen are constantly in search of new methods that improve profit margins or increase efficiency. LCC originated in the seventies, and it is hard to imagine that business would not jump at the chance to adopt it if it provided a strong advantage against competitors. There must be a reason for the slow transition to LCC if they experience a greater benefit in TCO and LCA. LCC purposes This section is quite useful where it provides a frame of references, adapted from Barringer and Webber (1996). The functionality of LCC in different applications provides the reader a better grasp of LCC’s usefulness, although the treatment is rather superficial. Still, the brief explanations are welcome, and going too deeply into any one of them may take the paper away from its general approach to which the authors appear committed to pursue. The subsection is rather brief, though, and it would have been better if the description of LCC’s uses were a bit more thorough. Life cycle costing methods The discussion in this subsection is a bit more thorough, although the discussion of methods (how a procedure is done) would have been more useful if coupled with it purpose (why a procedure is done). Then there would have been a more meaningful insight into why other methods are better received than LCC. It is also in this part of the discussion where the authors admit the shortcomings of LCC, in the stochastic nature of its calculations, the need to forecast future cash flows and an appropriate discount method to employ in time value of money computations. The distortionary effect of inflation over the long term is likewise mentioned. To address these concerns, the study admits that sensitivity analyses, Monte Carlo simulation, and other similar methods may be needed to support LCC (Emblemsvåg, 2003). Also, the use of specialized commercial standards such as ASTM International 2002 for the building industry, and International Eletrotechnical Commission, 2004 for a broader industrial application, are needed to assist in life cycle cost analysis. In these admissions alone, it is as if the study is providing the answer, in a low profile manner, to the opening question as to why LCC is being adopted much slowly in business application despite assumed advantages over other costing methods. Research design Data collection The description of the data collection method used in the study was too detailed and unnecessary items were included. The study, prepared in 2008, already took place in an academic environment where access to databases is presumed without mentioning, thus to give it such emphasis in the paper, going as far as to specify the search terms used (predictably “life cycle cost” and “case”, and “life cycle costing” and “case”) becomes pedantic. It gives the reader the impression that going into such detail in the explanation may mean the researchers did not exhaust all other possible search words to arrive at salient studies. Furthermore, the study mentioned that the search words were specified for abstract, title and keywords sections only. In fairness to the researchers, these may have been the limitations in 2006 when the paper mentioned the searches were conducted, but it should have taken care to use as much of the search capabilities as possible and should have employed intext searches as well had it been available, and to screen on the basis of their firsthand perusal of the study. Even today, there are instances when not all the important words are mentioned in the keywords sections of published studies. On the other hand, rejection of full-text versions did not necessitate another step in the process. Full-text screening is available in many, if not all, of the databases mentioned, and the researcher would have saved one step in the process. In any case, inclusion of this detail in the study gives the impression of a novice’s approach to online researching and should be edited out of the manuscript. The other criterion for rejection, that the article did not meet the criteria of the researchers, is well taken. While there is a temptation to ask by what standards the rejected studies were measured and found wanting, the quesiton invites splitting hairs and does not really contribute to the advancement of the study. For all intents and purposes the authors’ judgement in this area is deemed more than sufficient, and their selection of cases is assumed to be adequate. Overall, the description of the research design should discuss less of the inconsequential details, and discuss more of the substance of the criteria used to screen the selected case studies, why these criteria were important in qualifying the case studies for inclusion (therefore excluding others), and any special considerations in applying them to the case studies selected. Case analyses The tabulation of the different features in analyzing the case studies is a welcome device in the study. It is concise, aids in understanding how the authors conceptualized the case studies, and provides a quick reference to guide the reader during the discussion of results. Research results Operating environment In analyzing industry and public sector influence, there is a disproportional distribution of cases according to the sector they cater to. The study mentioned two thirds of the articles (34) catering to the construction industry, and the remaining one-third representing energy, transportation and manufacturing. Research and real estate were discontinued for the reason that they were represented by only one study each. There is thus a strong leaning towards one particular industry, and on the whole towards the heavy technical, utility and infrastructure industries (construction, energy and transportation). Manufacturing is unqualified, which may refer to the heavy (e.g. automotive) or light (e,g., garments) manufacturing subsectors. However, manufacturing claims only 6 of the total 43 studies, rendering its contribution only minor and of itself not determinative of any trend in the findings. Another concern is, as the study pointed out, the strongly academic focus of the sample case studies (37 of the total of 43), making it difficult to assess the perspective; actually, all the case studies were “written by academics with rather unclear contacts to the actual companies” (Korpi & Ala-Risku, 2008, p. 247). The heavily skewed sample should be taken into account with respect to the purpose of the study. Earlier the authors stressed that the study was important for the purpose of preparing a broad based study that spanned all sectors and industries cross-sectionally, and represented the manufacturer’s as well as client’s perspectives, and the points of view of academics and professionals. From the sample arrived at, this objective did not seem to be achieved. There is thus immediately the question as to whether this study can achieve the purpose it set out to achieve. Much like the dilemma of the chicken and the egg, there is a problem of causality: LCC studies were observed to concentrate on limited areas of concern, so the authors embarked on a broad based study. However, since the approach was a qualitative review of existing literature, the broad based study turned out to be concentrated in certain categories. Purpose of the analysis. The study adopted Barringer and Weber’s (1996) model that enumerates possible functions for LCC, according to which the purposes for which the analyses were made were classified. Slight modification was made to adapt the model to a multi-product and multi-vendor environment. The study allowed for multiple categories to which the same study may be classified. What the study failed to describe was Barringer & Weber’s original model, and the specifications for that model that qualify it to be the ideal prototype for this study. The 1996 study may be premised on conditions which this study taking place more than a decade after would not be susceptible. The reader may not be entirely convinced of the appropriateness of the original model, but may be persuaded to favourably regard the use of the Barringer and Weber model because the authors have made it a point to qualify the model and adjust it to the specific purpose of their study. The modifications to allow for multiple products and systems were important, convincing the reader that the authors carefully considered the differences in circumstances surrounding the formulation of the original model and this study, for which they may be given the benefit of the doubt that the model was not blindly adopted. In the course of its discussion, the study mentioned that several other articles forwarded two other notable benefits of LCC (page 249) but die not elaborate further than that. Since the study did not use this input in furtherance of the analysis, but merely as added information, it should be presented in the earlier chapter on review of academic literature, so that it does not purport to present these findings of other authors as this study’s own findings. Methods and coverage The study states that it had made distinctions among the case studies as to life cycle phases. This would have been easily grasped if the case studies were all situated in the same industry, or the same kind of good produced or service delivered. However, there appears to be no basis for assuming that all the businesses or industry sectors represented in this study have a common sequence of phases, or even the same components. For instance, the R&D category is mentioned, when it is generally acquiesced that R&D will figure prominently in some industries and may not even be undertaken by others. In manufacturing, for instance, some manufacture items require a significant investment in product research and design depending on the sensitivity of the product to changing market tastes and preferences. However, some manufactured products have been standardized to a degree that changes are not instituted based on R&D but in response to adjustments in industry standard, government regulation, and so forth. For the study then to have distinguished the case studies as to phases and to have drawn a generalization from this might have introduced a measure of arbitrariness, and distinctions drawn are conjectural rather than real. Information sources. The study mentions that in a great majority of the cases (83%) the source of information was reported as internal, but admits that the meaning of “internal” was not specified. This vagueness in the particular data source leads the reader to doubt the reliability of the data. Data sources should be explicitly described because, given that the methodology is sound and analysis well executed, the reliability and validity of the data account for the reliability and validity of the entire study. By “internal” may be meant many things. The data may be internally generated by the production statistics or financial accounts pertaining to one company, or it may refer to the information “internal” to an industry vis-à-vis the wider economic environment. The reader is not privy to the individual case studies used by the researchers, but when the study itself states that “unfortunately, the internal sources of cost information were not described so deeply in the case studies” then one is led to believe the possibility that “internal sources” may be comprised of a wide variety of sources that their description as “internal sources” is more a loose nomenclature than a substantive categorization. Conclusions drawn based on this category should thus be relied upon sparingly, if at all. Another caveat is presented by the observation in the study that the manufacturers’ reporting of information sources was “deficient”. This apparently was traced to the fat that Manufacturers are not sufficiently able to secure information from their customers sufficient to support life cycle cost analyses. The question lies in why they were unable to do so. Manufacturers form special networks and bonds among their distributors, and therefore should be able to source information through the retailers. This further limits the scope of the study, contrary to the original intention of the study which was to broaden the survey as far as possible. The inadequacy of life cycle data renders life cycle cost analysis incomplete, and therefore unreliable. In such instances, only the initial investment costs are available, reducing the study to a study of the costs of acquisition – the very type of study initially mentioned by this study as prevalent but inadequate, and for which it mentioned the superiority of the LCC. The absence of life cycle data therefore reinforces the usefulness of the more common initial cost studies over the more speculative LCC method of analysis. Conclusion The issues that surfaced in earlier sections of this paper have contributed to weaken the conclusion, particularly where subjectivity, speculation, and imperfections in cost estimation are prevalent. Other than these, reference to findings of other researches such as those of Fabrycky and Blanchard (1991) and Woodward (1997) without further qualifications, do not belong in the conclusion, but in the review of literature. The conclusion should concentrate on the material findings of the paper. Comparison to another article Another article chosen for comparison is Hutton and Wilkie (1980), which though slightly dated, is adequate where Korpi and Ala-Risku (2008) falls short. Hutton and Wilkie squarely situate their study in the consumer viewpoint, providing immediate sufficient study. Unlike the general study undertaken by Korpi, this other study has a focus that limits the variables to be observed and controlled. Secondly, while Korpi uses literature review, Hutton employs the experimental method, thereby creating fresh data from which to draw conclusions. It therefore avoids the pitfall of Korpi of being limited by the findings of other researches, and is capable of opening up the field of academic literature directed at the exploration of LCC application. Thirdly, because of the application of controlled procedures through the use of the scientific method of inquiry (i.e. experimentation), direct line-of-sight from the objective to the conclusion is established, making the resulting findings more reliable and credible. Overall, it may be said that the objectives of Korpi could not be addressed in the same way those of Hutton are. However, all research must be integrated, such that the objectives, methodology, and analysis should support one another and lead to one cogent conclusion. Korpi should find a way to articulate the research question in such a way as to eliminate its innate contradiction, that it relies for its data on the same literature which it deems to be inadequate, and for which it was supposedly being undertaken. Lacking this degree of integration and a more objective analytical criterion, the study is reduced to a review of related literature and little more. 1.3 Implications for Management Accounting (MA) The main MA issues raised in this paper is the usefulness of life cycle costing in managerial decision making in different industries and a variety of purposes. Minor or supportive issues include whether or not LCC is effective for decision-making, and in what situations it is viable. Theoretically, there is no reason why LCC should not be considered superior to the more traditional methods involving initial costing. In practice, however, fewer managers resort to LCC. From what I had learned, LCC is good on paper but is difficult to implement in practice. Firstly, LCC is forward looking and therefore speculative. From a manufacturer’s point of view the pertinent data is costly and impractical to get, because the product may be put to many different uses and therefore involve different cost elements and structures. From a customer’s point of view, estimation of future related costs may be easier because customers are certain about the use they will put the product to. There are still uncertainties, however, in the form of inflation and exchange rates, and other indicators that tend to shift over time. In either case, there is a speculative factor that could not be eliminated. On the contrary, initial cost methods are more reliable and certain; because they occur at the present, the amounts involved are certain. Secondly, LCC’s estimation methods introduce a good deal of subjectivity. Because of the lack of fixed regulations or guidelines that may be followed, the analyst is tempted to ignore certain associated costs that, while less intimately connected with the asset, would not have otherwise been incurred without the asset being present. Personal attachment one way or another can sway selections that, while individually minor, may collectively change the outcome. Finally, LCC’s methods are difficult to master to produce consistent results. Both the lack of objective guidelines and the element of speculation can be treated through different and equally valid methods to arrive at very different results. The LCC is more of an art, allowing the analyst much leeway in determining what factors should be materially incorporated into the study. Two different results for the same set of circumstances will tend to detract more rather than contribute to the reliability of the managerial decision arrived at. The findings yield some practical usefulness, however. The weaknesses pointed at are likewise considerations valid for application in assessing any type of analytical tool. The faults of LCC, once identified, may be addressed by adopting safeguards, providing for conventions and standards, and devising procedures for common application to enhance the consistency comparability of results. The shortcomings of LCC pointed out in this study pertained to past case studies, and do not diminish the fundamental soundness of the principle behind life cycle costing. Therefore, with the use of supportive techniques such as those suggested by Emblemsvåg (2003), there is real potential value in the use of LCC in future management accounting applications. 2. Suggestions for Improvements Throughout the analysis, suggestions have been given, which shall be reiterated here. The title needs to be changed as suggested, although a better formulation may be available. The use of LCC should be explored in areas of study not requiring heavy capital equipment, or not within the construction, utility, and manufacturing sectors, with an emphasis on public sector purposes. As was noted in the paper, LCC was supposed to have been used in research and real estate, but studies on these were too few that they were discarded. As the researchers themselves suggested, the research method for the next study should employ actual field data. This study proceeded on the premise that the existing literature was deficient, and yet relied on it for data, creating its inherent weakness. New data must be sourced from the field from those sectors this study originally identified as needing to be explored. Finally, in the manner the findings were discussed, the original work had not been able to explain many of the results and their implications, which have been identified as they were encountered. The failure to substantiate the validity of data, methods, or results arrived at would tend to diminish from the value of the work. 3. Description of the planning of your analysis of the research paper The analysis was approached systematically section by section, since the preceding section has a bearing on succeeding sections, and errors in the earlier sections will qualify the analyses for the next sections. The sources used in the analysis were mostly drawn from academic journals scanned by EBSCO, Science Direct, ProQuest, and JSTOR. The timetable for the conduct of the study is as follows: Table 1: Time table of study analysis and preparation No. Activity Time duration 1 Preliminary survey of academic studies 4 days 2 Formulation of initial analysis 2 day 3 Survey and choice of second article 3 days 4 Writing of the essay 4 days 5 Proofreading and editing 1 day Total 14 days References: Dhillon, D S 1989 Life Cycle Costing: Techniques, Models and Applications. Gordon & Breach Science Publishers, New York, N.Y. Emblemsvåg, J 2003 Life Cycle Costing: Using Activity-Based Costing and Monte Carlo Methods to Manage Future Costs and Risks. John Wiley & Sons, Inc., Hoboken, New Jersey Hutton, R B & Wilkie, W L 1980 Life Cycle Cost: A New Form of Consumer Information. Journal of Consumer Research, March 1980, vol. 6, pp. 349-360 Korpi, E & Ala-Risku, T 2008 Life cycle costing: a review of published case studies. Managerial Auditing Journal, vol. 23, no. 3, pp. 240-261 Oguri, T. 2005 Functions of accounting regulation: alternative perspectives based on Marxian economics. Critical Perspectives on Accounting, vol. 16, pp. 77-94 Read More