Management And Accounting Web

Roehm, H. A. and J. R. Castellano. 1999. The danger of relying on accounting numbers alone. Management Accounting Quarterly (Fall): 4-9.

Summary by James Cline
Master of Accountancy Program
University of South Florida, Summer 2002

Balanced Scorecard Main Page | Performance Measurements Main Page

If this article were to be described in one word it would be manipulation. In his book Fourth Generation Management, Brian Joiner says that there are three ways to get better reported results:

improve the system,

distort the system,

distort the figures.

The use of accounting information for controlling people and processes often results in a failure to understand the capability of a process and actual distortion of the process.

The authors of this article do not bring forth any new information; they simply restate ideas of other authors regarding the use of accounting numbers to manage processes, and give an example to easily present those ideas.

Correcting a Problem in the Wrong Way

The company: A cereal producer.

The problem: Too many raisins being used.

Each cereal box should contain two ounces of raisins and ten ounces of cereal.

Management allowed for 5% shrinkage (arbitrary number). So, accounting data allowed for 2.1 ounces of raisins per box. However, during the previous month 43,200 boxes were produced with a consumption of 108,000 raisins. An average of 2.5 ounces per box.

The Fix

Management offered bonuses to employees if they could get total consumption down to 2.1 ounces per box. The problem was corrected and bonuses were given out.

The New Problem

Market research found that consumers were dissatisfied with the quantity of raisins found in the cereal.

The investigation

There were two procedures relevant to the problem. The first was the acquisition, preparation, storage, and transportation of the raisins to the packaging process. The second was a fully automated packaging line where the fruit and cereal were mixed, packaged, and boxed for shipment. Statistical analysis was used at the end of the second stage on total box weight and found the process to be in control. The four months prior to the investigation were within the upper and lower limits. Since the process was behaving in a stable and predictable manner, it is possible to determine process capability. Capability can be changed only by changing one of the process components that determine the process: people, machines, material, methods, and environment.

The Results

After examining both processes, it was determined that the problem exists in the fruit process, not the packaging process. The problems were too much roughage with the raisins from the supplier, cleaning procedures allowed too many raisins to be destroyed, and loss of raisins from the worn conveyor belt. Individually, each problem was not significant. However, added together they became a major source of the loss.

The Question

How did the employees get total consumption down to 2.1 ounces of raisins per box without correcting the problems?

They manipulated the process. They adjusted the settings on the machines that added the raisins to the boxes.1

Lessons learned

Accounting reports do not reflect the complete process; nor do they provide any indication as to the source of the problem or how to correct it. Because the firm relied solely on accounting data to manage the system, process managers were able to manipulate the accounting reports by manipulating the system. The process managers were told to correct a problem that they had no control over, so they changed what they could to control the accounting problem. Management must understand processes, process capability, and variation in order to control costs and attain cost targets. It is time to replace accounting control of processes with statistical process control.


1 This is a good example of what Deming refers to as tampering with a system or process. See Chapter 9 of my summary of Deming's New Economics listed below.

Related summaries:

Castellano, J. F., S. Young and H. A. Roehm. 2002. Teaching business as a system. Management Accounting Quarterly (Summer). (Summary).

Deming, W. E. 1993. The New Economics For Industry, Government & Education. Cambridge: Massachusetts Institute of Technology Center for Advanced Engineering Study. See Chapter 9. (Summary).

Holmes, D. S. and R. E. Hurley. 2003. How SPC enhances budgeting and standard costing - Another look. Management Accounting Quarterly (Fall): 57-62. (Summary).

Nolan T. W. and L. P. Provost. 1990. Understanding variation. Quality Progress (May): 70-78. (Summary).

Reeve, J. M., and J. W. Philpot. 1988. Applications of statistical process control for financial management. Journal of Cost Management (Fall): 33-40. (Summary).

Roehm, H. A., L. Weinstein, and J. F. Castellano. 2000. Management control systems: How SPC enhances budgeting and standard costing. Management Accounting Quarterly (Fall): 34-40. (Summary).