Management And Accounting Web

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

Short Summary in a Question and Answer Format

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Relevance Lost Main Page | Long list of Questions and Answers

Citation: Martin, J. R. Not dated. Relevance Lost in a question and answer format. Management And Accounting Web. http://maaw.info/RelLostShortQuestions.htm

Chapter 2 (1812-1880) - NINETEENTH-CENTURY COST MANAGEMENT SYSTEMS

1. What is the purpose of the book? (See the Chapter 2 summary and the Back cover of the book for some ideas.)

2. Why do J&K give the reader a history lesson? (See the Chapter 2 summary).

3. What caused a need for internal accounting information, i.e., how did management accounting begin? (See the Chapter 2 summary and the Johnson 83 summary).

4. What do J&K mean by internalized processes? (See the Chapter 2 summary and the Johnson 83).

5. What was the domestic system? (See the Chapter 2 summary and the Johnson 83).

6. What was the control mechanism in the domestic system? (See the Johnson 83 and the Ouchi summary for three control mechanisms).

7. How was early management accounting relevant? (See the Chapter 2 summary).

8. What is the matching concept? (See MAAW's Textbook Chapter 1).

9. Did these early firms (textile, steel, railroads) use the matching concept? Why? (See the Chapter 2 summary).

10. How was inventory valued by these firms? (See the Chapter 2 summary).

11. Was depreciation used? Why? (See the Chapter 2 summary).

12. What new development in the railroad industry caused a greater need for accounting? (See the Chapter 2 summary).

13. How did the applicable control mechanism change during the 1800's, i.e., from what to what? (See the Johnson 83 and Ouchi summary for three control mechanisms).

14. Which came first, management accounting or financial accounting? What do J&K mean by the terms management accounting and financial accounting? (See the Johnson 83 and the Chapter 2 summary).

15. Where do most accountants work, i.e., management accounting or public accounting?

Chapter 3 - EFFICIENCY, PROFIT AND SCIENTIFIC MANAGEMENT 1880-1910

16. What is responsibility accounting? (See the Responsibility Accounting concept and the Responsibility Accounting summary exhibits).

17. Why were standards developed? (See the Chapter 3 summary, the Johnson 1983, Cooper 2000, Gantt, and Church summaries ).

18. How did accountants use standards? (See the Chapter 3 summary).

19. If Hamilton Church were alive today, what would he probably say about ABC?

20. Does the overall profit measurement for a company require accurate product costs? (See the Chapter 3 summary).

21. Explain your answer to 20, i.e., why? (Hint: Think of inventory changes and see the controversy over ABC).

22. What do J&K mean by the terms heterogeneous products and complex processes? (See the Chapter 3 summary).

Chapter 4 - CONTROLLING THE VERTICALLY INTEGRATED FIRM: THE DU PONT POWDER COMPANY TO 1914

23. What was different about DuPont, GE and American Tobacco in relation to prior firms? (See the Chapter 4 summary and Johnson 83).

24. J&K say they were vertically integrated. What does that mean? (See the Chapter 4 summary and Johnson 83).

25. What is the "agency problem"? (See the Chapter 4 summary).

26. How did these firms deal with the agency problem? (See the Chapter 4 summary).

27. What are two main types of business strategy, i.e., related to how to compete? (See the Chapter 4 summary). (What is a business strategy? See Porter 96).

28. Which strategy did these firms use? (See the Chapter 4 summary).

29. What is ROI or return on investment, how is it calculated? (See the Chapter 4 summary, MAAW's Chapter 14 and the DuPont Graphic).

30. How is ROI better than operating income or net income as a measure of performance? (See MAAW's Chapter 14).

31. How did DuPont decompose ROI, i.e., separate it into two parts? (See the DuPont Graphic and MAAW's Chapter 14).

32. What is the significance of the decomposition or ROI? (See MAAW's Chapter 14).

33. What is capital rationing? (See the Chapter 4 summary).

34. How did DuPont use ROI? (See the Chapter 4 summary).

35. How many possible net income amounts could be calculated for a firm that would be acceptable for GAAP, i.e., your estimate of the possible numerators in the ROI calculation? What was Chamber's estimate?

36. What is the transfer pricing problem? (See the Chapter 4 summary and MAAW's Textbook Chapter 14 summary).

Chapter 5 - CONTROLLING THE MULTI DIVISIONAL ORGANIZATION

37. What do J&K mean by decentralization? (See MAAW's Textbook Chapter 14 summary).

38. Why did multi-activity firms began to use the decentralized form of organization? (See the Chapter 5 summary and consider the concept of diseconomies of scale).

39. What does the term delegate responsibility mean? Can responsibility be delegated? (See the Chapter 5 summary).

40. How were the division managers at GM and DuPont evaluated? (See the Chapter 5 summary).

41. DuPont developed a number of new measurements and techniques like flexible budgets. What is a flexible budget? (See MAAW's Exhibit 9-3).

42. Do standard cost variance calculations use flexible budgets? Which ones? (See the Profit Analysis Graphic for a summary of variances).

43. How did GM prevent managers from engaging in dysfunctional behavior to manipulate ROI? (See Chapter 14 section on ROI investment bases, the Chapter 5 summary).

44. According to J&K was management accounting still relevant in these firms around 1920? (See the Chapter 5 summary).

Chapter 6 - FROM COST MANAGEMENT TO COST ACCOUNTING: RELEVANCE LOST

45. What do J&K mean by "relevance lost". (See the Chapter 6 summary).

46. Why was there a shift in emphasis to external reporting? (See the Chapter 6 summary).

47. Their ultimate question is why managers would use irrelevant information to make management decisions. What is their answer? (See the Chapter 6 summary and Johnson 1987 summary). How did Noreen, Vollmers, and Horngren respond to J&K's view on this question? How about Flamholtz?

48. What does the main message of the book appear to be at the end of chapter 6? (See the Chapter 6 summary).

Chapter 7 - COST ACCOUNTING AND DECISION MAKING: ACADEMICS STRIVE FOR RELEVANCE

Perhaps the two main contributors to the development of management accounting between 1920 and 1960 were Clark (different cost for different purposes) and Vatter (relevant costs and different cost for different purposes, budgeting & control). Current management accounting evolved from their work. Other key contributors were Dean (capital budgeting), Simon (3 functions for managerial accounting) and Anthony (framework for planning and control). There were also some quantitative models developed in operations research, linear programming, cost-benefit analysis etc.

49. Did these developments make management accounting relevant again? (See the Chapter 7 summary).

50. What do J&K say was the problem that prevented accounting from regaining relevance? (See the Chapter 7 summary).

Chapter 8 - THE 1980'S: THE OBSOLESCENCE OF MANAGEMENT ACCOUNTING SYSTEMS

51. J&K criticize managers for placing too much emphasis on financial results during 1960-1980, i.e., "the financial accounting mentality." What is wrong with placing emphasis on financial results? (See the Chapter 8 summary).

52. They also said that textbooks used simple models that were inadequate and misleading. How are simple models inadequate and misleading? (See the Chapter 8 summary).

53. According to J&K what is wrong with using direct labor hours, or direct labor costs, to allocate indirect costs, or overhead, to products? (See the Chapter 8 summary).

54. What do they mean by cross subsidies? (See the Chapter 8 summary).

55. J&K say cost accounting information is too late and too aggregated. What do they mean by this, i.e., too late and too aggregated for what purpose? (See the Chapter 8 summary and Exhibit 2-4).

56. Is the "fundamental flaw in the financial accounting model" really a flaw of the accounting system, or a flaw in the ethics of managers, i.e., do you think this is a systems problem or an ethics problem? (See the Chapter 8 summary).

Chapter 9 - THE NEW GLOBAL COMPETITION

57. The global competitive environment had changed significantly by the 1980's. How have the following relationships, characteristics or techniques changed and what are the effects of these changes according to J&K? (See the Chapter 9 summary).

Relationship, Characteristic or Technique Change and Effect of Change?
Labor cost relative to total cost.*
Profit margins and product cost requirements.
Product life cycles.
Pricing.
Quality.
Standard cost measures of efficiency.
Organization structure.
The old management accounting model.
GAAP influence on the management accounting model.

*See Boer and Jeter for a different view.

Chapter 10 - NEW SYSTEMS FOR PROCESS CONTROL AND PRODUCT COSTING

The following exhibit summarizes some of the J&K material in chapter 10.

Exhibit 2-4*
Characteristics and Requirements Related to the Four
Functions of Information or Cost Accounting Systems
Characteristic or Requirement External Financial Statements Planning and Controlling Activities or Processes Short Term Strategic Decisions Long Term Strategic Decisions
Audience 1 2 3 4
Outside investors, creditors, IRS and SEC. Plant, production and operating managers. Marketing, product, business and senior managers. Marketing, product, business and senior managers
Type of information required Aggregated quantitative overall financial results. Disaggregated quantitative and qualitative non-financial information on specific activities and processes. Disaggregated quantitative and qualitative financial and non-financial information on specific products, services, customers and suppliers. Disaggregated quantitative and qualitative financial and non-financial information on specific aspects of the company’s competitive strategy.
Reporting interval required Quarterly. Real time, hourly or daily. Annual or life cycle unless product design or process changes. Special studies performed periodically.
Decision Examples Should an investor purchase, or dispose of the stock or bonds of this company? What resources are needed for the period? Are specific processes in control? Should the company continue producing current products and services? What prices should be charged for products and services? Should the company replace a machine, build a new plant, reengineer a product or process, convert to a JIT system?

* From MAAW's Textbook Chapter 2.

58. Which audience was cost accounting designed to serve? (See the Chapter 10 summary).

59. According to J&K, how well do we serve audience 2? (See the Chapter 10 summary).

60. According to J&K, how well do we serve audience3? (See the Chapter 10 summary).

61. According to J&K, how well do we serve audience 4? (See the Chapter 10 summary).

Chapter 11 - PERFORMANCE MEASUREMENT SYSTEMS FOR THE FUTURE

62. What does the saying "You get what you measure" have to do with accounting? Is accounting neutral and unbiased? Should it be? Could it be? (See the Chapter 11 summary and Flamholtz).

63. Why do J&K say that accounting measurements are invalid measures of performance? (See the Chapter 11 summary).

64. What are some examples of measurements that are valid measures of performance? (See the Chapter 11 summary).

65. What do J&K mean by "accounting for accountants is wrong"? (See the Chapter 11 summary and Johnson 1987).

Chapter 1 - INTRODUCTION (USED TO EMPHASIZE SOME KEY IDEAS)

According to J&K, financial accounting information

66. is too late for
Audience 1?
Audience 2?
Audience 3?
Audience 4? (See the Chapter 1 summary).

67. is too aggregated for
Audience 1?
Audience 2?
Audience 3?
Audience 4? (See the Chapter 1 summary).

68. is too distorted for
Audience 1?
Audience 2?
Audience 3?
Audience 4? (See the Chapter 1 summary).

69. is too narrow for
Audience 1?
Audience 2?
Audience 3?
Audience 4? (See the Chapter 1 summary).

70. In your opinion, who, or what caused these problems? Explain your answer.
a. The American economic system and culture.
b. Organizational structure and culture.
c. The accounting profession including academic accountants.
d. Managers who misuse accounting.
e. Foreign economic systems, cultures, organizations etc. don’t play by our rules.
f. Other

71. What appears to be the current status of the short term financial accounting mentality?
(See the following summaries for some ideas. Collingwood, Dechow & Skinner, Healy & Wahlen, and Romney, Albrecht & Cherrinton).

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Realted summary:

Martin, J. R. Not dated. Relevance Lost in a question and answer format. Management And Accounting Web. http://maaw.info/RelevanceLostLongQues.htm