Johnson, H. T. 1989. Professors, customers, and value: Bringing a global perspective to management accounting education. Proceedings of the Annual Management Accounting Symposium: 7-20.
by Jeff Hackman
Master of Accountancy Program
University of South Florida, Summer 2001
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This paper was written to depict the discrepancies between current
management accounting education and the new activity management philosophy
evident in the business community. The paper also explains why current
traditional management accounting practices no longer work in modern businesses.
In addition, the paper suggests flaws with current education and possible
One of the main contributing factors to the gap
between current education and business practices has occurred as a result of a
lack of communication. It would be most beneficial for management accounting
professors to solicit views from management accountants in business about
current problems and proposed solutions. On the other hand, it would be equally
beneficial for executives to seek advise from professors about what their
research suggests would be a viable solution for their management accounting
The majority of the deficiencies in traditional
management accounting stem from two developments.
developments created a heightened competitive environment, which traditional
management accounting was not ready for because competitiveness was defined as
beating your competitors on cost. This mentality states that you control unit
costs and achieve profitability by producing all you can sell at a price that
exceeds variable costs. The new environment requires two steps for
competitiveness, which traditional systems did not provide: listen to the voice
of the customer, and continuously eliminate waste.
Companies succeed by learning what will satisfy customers, identifying what work is needed to provide that satisfaction, and finding unnecessary work. The key is to manage the activities, not the costs. An activity audit is a start and has helped some American companies find that 50 to 90 percent of the work they do adds no value to customers. The chief characteristic of a globally competitive operation is the continuous flow of value-adding activities as fast as possible. This entails producing only what customers want, when they want it, and the ability to stop production to correct mistakes. Understanding the cause and effect of activities and value requires information. There are three popular approaches to deal with the role of information in activity management:
· Activity management (AM)— measure the nonfinancial outcomes of activities. This approach virtually ignores costs and focuses on eliminating waste because there is some waste in all activities.
· Activity cost accounting (ACA)—measures the costs of activities, focuses on eliminating waste because, views certain activities as inherently wasteful, and prompts management to look at different cost drivers.
· Activity-based product costing (ABPC)—focuses on activities as the logical place to assign costs, also prompts management to look at different cost drivers other than production volume.
Activity cost accounting and activity-based product costing do not provide the signals that automatically lead to global competitiveness because they do not change the perspective underlying traditional cost variance control systems. The emphasis is on subdividing work by function and specialty and producing as much output as possible to achieve scale economies.
Although the focus of activity cost accounting is on eliminating non-value adding work (moving, storing, inspecting, scheduling and waiting), the real challenge facing companies is to understand how to organize operations so that non-value activity becomes unnecessary.
Professors must redefine the phenomena they study because they have focused on two phenomena: the firm and the individual. One problem with this focus is that current managed organizations achieve results through group or team behavior. Johnson sees two fundamental flaws in our present curriculum:
(1) Emphasis on output rather than an emphasis on the activities that consume resources.
The problem is caused when management
accountants use the economists' abstract model of the firm to develop
information for production decisions. The related concepts of fixed costs and
breakeven volume are the most damaging because they promote increasing output to
lower unit costs. However, in the long run, this low cost strategy causes the
support activities viewed as fixed costs to increase (overhead creep). This in turn causes
additional pressure to increase output again to lower unit cost. The
process resembles a dog chasing its tail. Johnson says that a way out is to stop viewing
any cost as fixed. Instead, teach students to focus on the activities that cause
costs. Teach them how companies empower workers to satisfy customer wants, to
produce only what customers want, when they want it, with as little waste and
delay as possible. Educators should de-emphasize “the product” because products don’t cause
costs and revenues: people do. People cause costs by their activities that
consume resources and people cause revenue by creating customer value.
(2) Encouraging managers to control a company’s operating activities with accounting
information that is designed initially to plan and coordinate financial strategies.
This problem is caused when top managers roll down budgets to establish performance targets for lower level operating people based on the belief that companies can maximize wealth by managing financial numbers. But financial information, particularly cost control information such as standard cost variances, drives actions in the wrong direction. What is needed is information about activity outcomes to help workers find the sources of waste and value. For example, information such as space utilized, distance traveled, time required to do things, reject rates, customer responses, and total costs are helpful in continuous improvement efforts. Professors should stop teaching management by the numbers, and teach that operating activities are the strategic source of a company’s worth.
Professors must eliminate two main things from the management accounting curriculum.
1. The emphasis on integrating financial planning with control information and
2. the principle of constrained optimization.
Both concepts impede continuous improvement. An emphasis on variances from budgets limits managers’ attention to what it takes to achieve targets that are static and merely financial. An emphasis on determining optimum outcomes based on static constraints (implicit in the economists' theory of the firm) causes managers to focus on minimizing unit costs, rather than producing what is needed when it is needed. The path to global competitiveness is achieved by moving constraints, not by optimizing costs within constraints.
Summary of Recommendations:
1. Eliminate most of the material on financial control systems, especially the use of variances from standard cost budgets to measure the performance of operating managers. Budgeting is needed for planning, but should not be used for cost control.
2. Eliminate breakeven analysis and cost behavior, i.e., the fixed costs variable costs separation.
3. Eliminate the concept of constrained optimization.
4. Replace these concepts with an emphasis on managing customer value and finding and removing waste
in all activities.