Management And Accounting Web

Hiromoto, T. 1988. Another Hidden Edge: Japanese Management Accounting. Harvard Business Review (July-August): 22-25.

Summary by Lorena A. Webb
Master of Accountancy Program
University of South Florida, Summer 2001

Japanese Management Main Page | JIT Main Page

The purpose of this paper is to compare the differences in accounting between the United States and Japan. The major dissimilarities between the countries can partially be attributed to their philosophical and ethical differences. In Japan, managerial accountants focus their main objective on being influential rather than informing. They achieve this by motivating long-term goals through the use of practical non-financial information instead of providing information overload of monthly and quarterly reports. Unlike the United States, a primary objective of Japanese management is to link accounting practices with corporate goals and missions.

Internationally, it is un-debated that proper overhead allocation is necessary to avoid distorted product costs. The question is not if both countries agree with this theory, but what type of allocation do they believe is correct? Japanese manufacturers, like Hitatchi, allocate overhead using direct labor hours. In contrast, American theory assumes that direct labor hours as an overhead allocation leads to poor decision-making. These are conflicting opinions. Hitatchi believes in cutting direct labor hours to improve overall costs, long-term competitiveness, and an increase in desire for pro-automation. In addition, Hitatchi emphasizes the use of standard parts in their products to keep material costs lower. After Hitatchi adopted this approach, products that used non-standard parts were allocated additional overhead. Whichever method of allocation is used, the accounting system for the overhead should be in agreement with the long-term vision of the corporation and not for the sole purpose of cost reduction.

The Japanese commonly apply a market driven approach of target pricing to a product in the early stages of design instead of waiting until the developmental stages. Unlike the Americans, the Japanese lower product costs by implementing adequate product planning and establishing a target cost before producing the product. Products are designed and built with clear intentions to meet the correct price for market success. For example, Daihatsu, a Japanese motor company, has implemented Toyota’s theory of market driven accounting practices. The system is called genka kikaku. It begins with the shusha who is the manager in charge of the car production process from planning to sales. The entire process usually takes multiple continuous cycles, lasting approximately three years, only completed when the final design matches the lowest possible cost that can be attained (See figure below.)

Genka Kikaku Approach to Target Pricing

Daihatsu complements genka kikaku with a system called daiatari kanri. This additional system utilizes a per unit theory of cost management. From the daiatari kanri system, reports are generated for managers of specific workstations on how costs can be reduced with continual efforts and process improvement activities.

In the United States, the use of standard cost systems is a popular idea. Standard cost systems are influenced by engineering frameworks and are empowered by technology. This system is focused on reducing variances between the actual and budgeted cost in order to achieve the lowest attainable cost. In contrast, the Japanese believe in market-driven management. For example, NEC, a Japanese electronics corporation, had historically used standard cost systems, but is currently exploring market-driven management with an emphasis on departmental budgets. NEC believes standard costing worked well when they had a steady product range and standard costs, but in today’s society of rapid technological change, this system poses a grave danger. Cost standards cannot be revised quickly enough under this traditional standard costing system. Overall, standard costing systems are more concerned with the efficiency of the entire process of building a product than the effectiveness of placing it in the market. This is an excellent example of how the Japanese focus more on long-term goals by aspiring to obtain market share instead of the Americans, who are more oriented with short-term profits.

Accounting policies should be designed to harmonize with a corporation’s strategy. In contrast with the Americans, the Japanese place a strong emphasis on market share with a focus on the long-term. The Japanese demonstrate this theory by placing a high premium on the quality and timeliness of delivery of a product with an emphasis on low-cost production. In addition, the Japanese use non-financial measures to evaluate factory performance instead of solely cost. Overall, the Japanese do a better job of influencing their employees with their accounting theories to be continually innovative through encouraging them to actively participate in corporate strategy and quality improvement which results in the company maintaining their competitive edge.


Related summaries:

Cokins, G. 2002. Integrating target costing and ABC. Journal of Cost Management (July/August): 13-22. (Summary).

Monden, Y. and J. Lee. 1993. How a Japanese auto maker reduces costs. Management Accounting (August): 22-26. (Summary).

Sakurai, M. 1989. Target costing and how to use it. Journal of Cost Management (Summer): 39-50. (Summary).

Schmelze, G., R. Geier and T. E. Buttross. 1996. Target costing at ITT Automotive. Management Accounting (December): 26-30. (Summary).

Tanaka, T. 1994. Kaizen budgeting: Toyota's cost-control system under TQC. Journal of Cost Management (Fall): 56-62. (Summary).

Yu-Lee, R. T. 2002. Target costing: What you see is not what you get. Journal of Cost Management (July/August): 23-28. (Summary).