Noreen, E. Commentary on H. Thomas Johnson and Robert S. Kaplan’s Relevance Lost. Accounting Horizons (December): 110-116.
by Suzanne Character
Master of Accountancy Program
University of South Florida, Fall 2001
History & Development Main Page | Relevance Lost Main Page
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
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