Management And Accounting Web

Kaplan, R. S. 1983. Measuring manufacturing performance: A new challenge for managerial accounting research. The Accounting Review (October): 686-705. (JSTOR link).

Summary by Eileen Z. Taylor
Ph.D. Program in Accounting
University of South Florida, Spring 2004

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Kaplan begins by stating that American manufacturing is being outpaced by foreign firms. Further, he suggests that the management accounting discipline is partly responsible by focusing on the traditional methods of accounting that no longer have relevance to modern-day production. Finally, he suggests a new direction for accounting research, as well as for those who teach accounting.

The Problem

At the time the article was written, it was becoming evident that American manufacturers were seriously lagging behind their Japanese and Western European counterparts in terms of efficiency. It was apparent that we needed to change our ways in order to compete in the global markets. Although some individuals felt that the successes of Japanese firms were related to “cultural and environmental differences”, Kaplan points out that some American firms were successful when they adopted Japanese management techniques. In addition, Kaplan also notes that some Japanese techniques do not require a large investment in capital equipment, but rather a change in the way we think about manufacturing on the whole. Specifically, efficiencies can be gained through better inventory management, as well as through improved product quality and better production processes.

American managerial accounting concepts are, by and large, based on the model of manufacturing a stable product, with low uncertainties and little flexibility. In effect, our models are inappropriate for managing the manufacturing process for products in an early stage of their life cycle. A new approach requires that we discard our old, inappropriate, analytical models and look to newer, more flexible measurements that managers can use to manage their processes.

Specific Areas to Target for Change

Quality - American firms have allowed for Acceptable Quality Levels (AQLs) in their products. This meant that money and time was spent after production to fix problems. The Japanese approach is to strive for zero defects. They build quality into their products from the bottom up by focusing on product design and engineering. If a product is well-designed, and the production processes are well-defined, then the product will be made right the first time. Traditional methods of cost accounting have neglected to measure the savings resulting from improved quality. The point here is, if we don’t measure quality, we can’t know when we have increased it. Further, we need to develop measurements that quantify savings from improvements in quality.

Inventory - A second opportunity for improved manufacturing efficiency is found in inventory management. Our traditional methods were developed to operate in a given, controlled setting. In other words, we took for granted that we could only affect internal events. The Japanese approach looks beyond the plant. They focus on reducing inventory at all points in production. Raw materials inventory can be kept low by increasing the number of deliveries per week. Work-in-process inventory is reduced through tighter scheduling within the production line. This is achieved by reducing or eliminating set-up times and reducing back logs that previously occurred when products were defective. Finished goods inventory can be reduced significantly by developing close relationships with customers and better predicting sales patterns. Overall, the “just-in-time” inventory approach, made successful through developing close relationships with suppliers and customers, results in reducing costs.

Productivity - Productivity measures have been largely ignored by current management accountants, however, they provide useful information that cannot be gleaned from the financial statements alone.

New Product Technologies - Kaplan points out that our current management techniques are designed to work optimally for products in a stable, mature part of their life cycle. Unfortunately, production in the early part of the life cycle is a great deal different from production in a stable environment. Innovation and flexibility are needed early on, when manufacturers are uncertain about the best way to produce an item. By using measures that work well on stable product lines, we are judging new product lines with the wrong criteria.

Discounted Cash Flows - In calculating savings using the DCF model, we tend to focus only on easily quantifiable savings from reduction of work force, materials, and energy. However, this gives a biased output, as more qualitative savings, perhaps savings from improved performance, are not considered in the overall calculation. The chance is great that DCF is missing important components and may therefore result in bad decisions.

Incentive Schemes - There is an unbalanced focus on relating incentives to quantifiable financial statement measures. Using incentives which are tied to short-term performance measures, such as earnings per share, leads managers to focus on short-term gains. Traditional pay schemes encourage management to forgo improvements that will have long-term positive consequences. Kaplan suggests taking a long-term approach to managing the organization.

The Research Strategy

Kaplan sees management accounting research as a necessary component in assuring that American firms be able to compete with their Japanese and Western European counterparts. Specifically, as American firms move from stable manufacturing of mature product lines, to producing flexible, innovative products, management will look to researchers for clear, valid measures by which they can determine their progress.

According to Kaplan, the best way for researchers to help develop such measures is to step away from traditional experimental and analytical methods, and get into the field. Only by working alongside “real life” managers and within companies, can researchers grasp the intricacies of the current challenge. Further, collaborative research with researchers from other disciplines (operations management and industrial engineering) will give management accountants a new perspective.

Finally, Kaplan warns that field research be undertaken with an open mind, as opposed to a “rigid research design.” This is not to imply that such research be descriptive; the researcher needs to come with ideas and models to test in a real world environment. It should also be noted that this research strategy is not recommended for Ph.D. students, or untenured professors as its novelty causes it to be high risk.

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Atkinson, A. A. and W. Shaffir. 1998. Standards for field research in management accounting. Journal of Management Accounting Research (10): 41-68. (Summary).

Ittner, C. D. and D. F. Larcker. 2001. Assessing empirical research in managerial accounting: A value-based management perspective. Journal of Accounting and Economics (December): 349-410. (Summary).

Ittner, C. D. and D. F. Larcker. 2002. Empirical managerial accounting research: Are we just describing management consulting practice? The European Accounting Review 11(4): 787-794. (Summary).

Johnson, H. T. 1987. The decline of cost management: A reinterpretation of 20th-century cost accounting. Journal of Cost Management (Spring): 5-12. (Summary).

Johnson, H. T. and R. S. Kaplan. 1987. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press. (Summaries & additional information).

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