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Noreen, E. 1987. Commentary on H. Thomas Johnson and Robert S. Kaplan’s Relevance Lost. Accounting Horizons (December): 110-116.

Summary by Suzanne Character
Master of Accountancy Program
University of South Florida, Fall 2001

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The purpose of this article is to convince readers of Relevance Lost: The Rise and Fall of Management Accounting to be skeptical of the authors’ criticisms and recommendations.

Noreen divides the book into three parts. The first chapters are dedicated to the evolution of management accounting through 1925. The following chapters show why today’s practices do not provide information relevant to current problems. Lastly, the conclusion of the book provides recommendations on how to improve management accounting.

The first argument Noreen makes is related to Johnson and Kaplan’s (J & K) critiques of current practice. J & K blame university departments for training modern managers to “manage by the numbers.” There isn’t much concern as to whether inventory valuation is relevant to managerial decisions. J & K believe that academic writers have contributed the most to the lost relevance of cost management by over simplifying the decision problems that managers face in real life.

Noreen disagrees with this criticism of universities. He says that academic writers emphasize comparing alternatives before choosing a particular method. They also explain the limitations of financial accounting data while expressing the importance of other data to the planning and controlling of operations.

J & K criticize the research in management accounting by saying it is confined to abstract models that do not represent realistic managerial situations. They also say that there has not been much innovation by management accounting practitioners. J & K disagree with using rates based on direct labor hours to assign overhead. Since direct labor has become such a small part of production the overhead allocation should not be based on these hours. The result ends up being a reduction in direct labor hours to cut overhead, where in fact, direct labor hours hardly affect overhead at all.

The second opinion that Noreen disagrees with is that all costs should be assigned to product lines by estimating long-run costs. J & K say that all costs, whether variable, fixed, or sunk, are the result of managerial decisions at some point in time. Therefore, these costs are controllable to some extent. A good product cost system should show how all costs vary with decisions. If you consider all costs as being variable in the long-run they can be traced to the activities that produce the costs. J & K say that we should abandon the systems that ignore fixed costs or the ones that allocate them on an arbitrary basis.

Noreen concludes that the only way all costs can be considered variable is if they are referring to capacity decisions. Even then, he still doesn’t think that all capacity costs are variable based on the scale of operations.

J & K want to allocate overhead costs by identifying “cost drivers” for each department. A cost pool is established for each driver. To get an allocation rate, the total cost in the pool is divided by the total number of transactions that created the costs.

Noreen doesn’t think that it would be worth the cost to set up an allocation system that allocates all overhead costs. He is skeptical that their “fully traced” costs could provide information to managers that would tell them what costs could be avoided. They assume there are no fixed or joint costs between the cost-drivers. Also, there is an assumption that the cost-drivers that are associated with a product line are directly proportional to capacity in that product line.

Finally, Noreen criticizes the idea that these “fully traced” costs are just another variety of fully allocated costs. He feels the authors are speculating with their recommendations, and the book is like reading an advertisement for consulting services.

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Related summaries:

Johnson, H. T. 1983. The search for gain in markets and firms: A review of the historical emergence of management accounting systems. Accounting, Organizations and Society 8(2-3): 139-146. (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. (Summary).

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

Kaplan, R. S. 1984. The evolution of management accounting. The Accounting Review (July): 390-418. (JSTOR link). (Summary).

Vollmers, G. L. 1996. Academic cost accounting from 1920-1950: Alive and well. Journal of Management Accounting Research (8): 181-199. (Summary).